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Analysis: Strategies, opportunities and challenges in MA 2020

Analysis: Strategies, opportunities and challenges in MA 2020

Everyone is excited, as the government has brought forth an implementable plan of action for the first time. Now to frame regulations and policies around it. Srinath Manda outlines how to address obvious and less evident challenges.


Considering that around 80 per cent of the world’s cargo moved is seaborne, and nearly 100 per cent of hydrocarbon transportation between nations is on the oceans, the maritime sector’s prospects are instrumental factors of the economic prosperity of the world. In India too, ports and shipping have always played a crucial role in the transportation sector and economic progress, with approximately 95 per cent of the country’s trade cargo by volume and 70 per cent by value currently being moved through maritime transport.


In the words of GK Vasan, Union Minister for Shipping and Ports, “One can imagine the importance of the ports and maritime sector for India, when 40 per cent of the GDP is linked to external trade and bulk of this trade is carried through shipping. India’s external trade, as a proportion of GDP has more than doubled in the last 10 years, and the country has witnessed unprecedented growth—as high as 23.8 per cent in exports from 2004-05 to 2008-09 and is expecting a huge jump again in 2010-11.”


As a result, the announcement of a first ever comprehensive and focused agenda—The Indian Government’s Maritime Agenda 2010-2020 (MA 2020)—with clearly stated targets to be achieved during the specified period is considered a major development for the maritime sector.


Of the long list of initiatives included within the MA 2020, the following are the most important ones that have scope to create immense growth opportunities for participants in the Indian maritime sector.


• To attain a port capacity of 3,200 mt
• To increase India’s share in global shipbuilding to five per cent from the present one per cent
• To increase the Indian tonnage four-fold to 43 million Gross Tonnage (GT)
• Promoting coastal shipping as an environment-friendly way to decongest roads.


Outlook and Opportunities


Shipbuilding: Looking up


The Indian shipbuilding industry predates the birth of the western civilisation. The Indian maritime tradition goes back to 3,000 BC when the ships of the Indus Valley Civilisation traded with the civilisations of the Persian Gulf. However, between 15th and 20th centuries the industry lagged in growth while several other nations emerged as hubs for the industry; during the 20th century, the Indian shipbuilding industry underwent a declining phase and remained largely insulated from the global boom in shipping and shipbuilding. In the later part of the century, even post independence, the shipbuilding business was dominated by inefficient public sector shipyards.


The Indian shipping services industry can be broadly classified into wet bulk (like crude and petroleum products), dry bulk (like iron ore and coal), and liners (like containers and others). At the end of 2010, India had an estimated capacity of 10 million GT with a fleet size of 975 ships, combined across all the above categories. The growth of the Indian fleet was slower until the economic liberalisation, mainly due to the traditional dominance of public sector shipyards in the shipbuilding industry and their complacent approach to growth. However, thanks to private investments, India is gradually becoming a preferred destination for small to medium sized vessels, especially off-shore vessels (OSVs). During the past decade, India attained a prominent position in the global ship repair industry segment, owing to its low cost skilled labour, and the advantage of being in close proximity to major trade global trade routes.


Currently, the Indian shipbuilding industry is represented by 29 main shipyards in the country, of which six are under Central Public Sector control, two under state governments, and 21 under private sector undertakings. But India’s share in global shipbuilding sector was less than one per cent as of 2010. As per Frost & Sullivan’s recent research, ‘Strategic Analysis of the Shipbuilding and Repair Market in India’, the Indian shipbuilding and repair sector recorded estimated revenues of $1.6 billion during 2010, of which about $150 million came from the ship repair segment. The sector’s revenues are likely to reach $3.5 billion by 2016, witnessing a compound annual growth rate (CAGR) of 14 per cent during the period 2010-16.


The primary drivers of this growth resulting in immense opportunities for industry participants include stringent International Maritime Organisation (IMO) regulations mandating replacement of all single-hull vessels with double-hull vessels, generating significant work opportunity for both shipbuilding and ship repair yards.


In addition, the global shipping industry’s trend of shifting production and service base to relatively low cost destinations such as China, Vietnam and India significantly benefits the Indian shipbuilding and repair segment. This shift has made the Indian shipbuilding industry a major hub for offshore vessels and pilot tugs.


Increased private sector participation has given a further boost to this industry. Major private shipping companies like Great Eastern Shipping, Essar Shipping, etc, have been steadily expanding their fleet. Private sector shipyards such as ABG and Bharati are playing a pivotal role in shaping the Indian shipbuilding industry.


The initiative announced in the Indian Budget 2011-12 that includes provision for domestic shipping companies to import spare parts duty-free, is likely to provide a boost to the country’s shipbuilding and repair industry and lead to consolidating the country’s growing strength in the ship repair segment.


Strong growth opportunities exist for participants in both shipbuilding as well as repair segments. Among the domestic private sector participants, ABG shipyard, Bharati Shipyards, Pipavav Shipyard, Adani Shipyard, and L&T Shipyard are likely to be among the top investors. However, multinational entities in shipbuilding and repair are likely to enter the fray soon and aggressively vie for, and benefit from, the high potential domestic shipbuilding market and ship repair business targeted mainly at the international shipping community.


Ports


In early February 2011, the Indian port sector (including both major ports and minor ports) crossed 1,000 mt capacity. This is double the capacity that Indian ports had in 2001. However, the new MA 2020 aims at attaining a port capacity of around 3,200 mt in the next 10 years, while the forecast annual cargo volume by that year would reach only 2,500 mt. This would mean achieving approximately 30 per cent spare capacity, which is considered optimum for efficient port operations. But building the massive additional capacity of 2,200 mt requires an estimated investment of approximately $66.51 billion (approximately Rs 3 lakh crore).


The Agenda aims to procure almost two-thirds of this investment from private participation through public-private partnership (PPP), thereby promising immense opportunities for companies operating in various activities such as port construction, development and operation and manufacturers of port equipment.


The opportunities are also likely to be more in case of non-major ports rather than major ports of the country. Non-major ports in the country have attained tremendous growth by increasing their share in total traffic handled by the entire port sector from 10 per cent in 1995 to 31 per cent in 2010.


As per Ministry of Shipping’s statistics, during the past three to four years, nearly 24 PPP projects involving an investment of $1.6 billion (Rs 6,486 crore) have been completed and are successfully operating in the maritime sector. Another 19 PPP projects involving an investment of about $2.77 billion (Rs 12,498 crore) are said to be under implementation and 21 more projects are reported to be under bidding. In addition, many new PPP project opportunities would need to be on offer if we were to achieve the targeted capacity within a short span of 10 years. Major projects are likely to be those aimed at building dedicated terminals and on-land infrastructure inside ports for high cargo volume and critical industries such as coal, minerals, metals, oil and gas and automotive.


Accordingly, to facilitate and encourage higher private sector investment on a faster pace, the Shipping Ministry has announced a favourable and investor friendly policy framework, which includes:


• 100 per cent FDI allowed in shipping and ports sector
• 100 per cent income tax exemption for a period of 10 years
• Standardised RFQ, RFP and model concession agreements
• Upfront tariff fixation by Tariff Authority for Major Ports (TAMP) for PPP projects


Containerisation


Within the total volume of commodities that can be containerised, only 35 per cent is done in India, and most of this is at the major and private ports. The top commodities that are containerised in the country include engineering goods, textile and garments, pharmaceutical products, leather goods, electronic and consumer durables, and processed food. The containerised commodities market is expected to grow at a CAGR of 16-18 per cent from 2010-2015, while the volume of non-container cargo is likely to grow at only 10-12 per cent during the same period. This indicates immense growth opportunities for participants in the containerised cargo services segment including container manufacturers, container leasing companies, container cargo transporters and other support service providers.


Planned large scale container terminal projects including mega container terminals at Chennai Port and Ennore Port, international container terminal at JNPT and the International Container Transhipment Terminal at Vallarpadam, are likely to be the focus areas for growth opportunities for the next three to four years, while other major ports and established private ports and non-major ports are likely to gain prominence in this area in five to six years.


Inland Waterways


Coastal and Inland Waterways are considered to be the most economical, safer and environment friendly mode of transportation for domestic cargo movement across the world; the practice is widely used by large industrial nations, including China.


India has an extensive network of coastal and inland waterways in the form of rivers, canals, backwaters and creeks, with a total navigable length of 14,500 km. Of this, about 5,200 km of river and 485 km of canals can be used by mechanised vessels.


However, freight transport by waterways has been highly underutilised in India compared to other large countries. Frost & Sullivan’s research found that only about three to four per cent of total transportation within the country is through this mode.


At present, the developing and governing body—Inland Waterways Authority of India (IWAI)—has a total five declared National Waterways for inland waterway transport; only these are being developed further for large scale navigation by the IWAI.


However, recent developments such as growth of dedicated private cargo sea ports across the country’s coastline, growth of new domestic coastal cargo transport providers and rising capabilities of existing providers have added momentum for considering this mode as a viable alternative by manufacturers and transporters at least in select routes within the country.


Challenges in realising the MA 2020 targets


Several challenges exist in achieving some of the key targets of India’s New Maritime Agenda


Shipping: The shipbuilding industry is plagued by various issues such as:


a) Lack of a powerful administrative authority in the Central Government resulting in procedural delays and unavailability of funds even for key initiatives,
b) Underdeveloped ancillary industries resulting in a high reliance on imports of components and spares,
c) Lack of investments in R&D resulting in limited capabilities in indigenous ship design and building thereby causing lost orders from modern ships,
d) Lack of a Special Economic Zone and subsidies as given by other leading shipbuilding nations like South Korea, China and Japan, which enhances their competitive advantage, and above all,
e) Acute shortage of deep draft water space along the coast, which severely restricts the Indian shipbuilding and repair capacity.


Port development and operation: In the ports capacity development, the high reliance on private sector investments may not be realised as per the expected pace. Though the experience with PPP projects in the ports sector has been very successful so far, it has not been without challenges. There have been considerable delays for investors and uncertainty in getting clearances from various ministries and agencies. Litigation during the tendering process also takes a heavy toll on some PPP projects. As a result, multiple prospective investors have voiced a need to streamline the clearance processes and to ensure that decisions are made within a timeframe and with a sense of urgency.


For private participants engaged in port development and operation, the list of challenges includes: obtaining environmental clearance, need for huge investments with in an environment of severe dearth of technical data about the waterfront, back-up area, desired transport mode connectivity to key distribution hubs, availability of sufficient hinterland next to ports for building storage and additional service infrastructure to attain global standards of operation.


Another challenge as acknowledged by Ministry of Shipping is that at the port level, the Port Trusts operate as regulators as well as operators, which causes conflict of interest.


There is also higher preference among private participants to invest in non-major ports since non-major ports are free to fix their own tariff while tariffs are fixed for major ports by the TAMP; this discourages investments in major ports though there is an acute and urgent need for their capability enhancement. End-user concerns that some non-major ports, which have locational advantage, are charging exorbitantly also need to be addressed by creating an enhanced role for TAMP in the changing context.


Logistics: Weak hinterland connectivity is a serious challenge for most Indian ports, with many of the ports still not having inter-connected multi-modal transport network accessibility, which reduces the scope for faster clearance of cargo either bound for export or import. This dilutes the utility value of ports.


Despite investment from the private sector being driven toward the modernisation and development of ports, not much effort is being put to develop an integrated transport system on a national scale, which can then be integrated with all the ports. As a result, shipping lines and trade are adversely affected, thereby leading to time and cost inefficiencies. It takes about 72 hours to move a container from the northern hinterland to Mumbai.


On an average, the Indian fleet’s capacity has been growing over the years at just five to six per cent per annum, and the Agenda aims to quadruple the current capacity of 10 million GT in just 10 years. This is possible only if large numbers of new ships are added by domestic shipping companies, which means millions of dollars of investments by each participant. Lack of adequate fleet capacity expansion by domestic shipping companies is resulting in low share of domestic participant shipping tonnage in India’s overseas trade. Considering that almost all existing Indian shipping companies lack such financial muscle, it would be a daunting task for the companies and also for the Government to support them in procuring such scale of funds and enabling the build-up of fleets in the short span.


Coastal and inland waterways: Challenges associated with developing the coastal and inland waterways into a major transport mode for domestic cargo movement include limited capacities and lower preference for domestic transportation and cargo handling by existing shipping companies and seaports. This approach results in delayed consignments even for short distances and scope for damages since most ports do not have substantial warehousing infrastructure to accommodate domestic cargo along with international cargo volumes. Also, lack of integration with other modes, especially rail (except in case of few select major ports), results in partial usage of the coastal mode with additional need of employing road mode for the remaining distance and minimising the intended cost savings on transportation. This also makes it difficult for transport service providers to offer an efficient multi-modal transport solution (except in very few select routes), despite heavy demand.


Recommendations for MA 2020


Though the New Maritime Agenda is a widely appreciated and welcome initiative for the sector, there are certain desired enhancements that would help improve the Agenda’s effectiveness and create the feasibility to achieve the ambitious targets set by it.


While the Agenda targets increasing draft (depth) at all ports to 14 m, it is recommend providing at least 20 m depth at the two hub ports and 17 m at all major ports. This would enable the largest sized ships to visit Indian ports and lead to higher cargo volumes and revenues.


The Agenda focuses only on developing the Vallarpadam International Container Transhipment Terminal (ICTT) on the west coast, but there is a significant need for another transhipment hub on the eastern coast as well.


In addition, to attain faster investments and participation by the private sector, policies for development of private sector funded berths at ports and land allocation for expansion of infrastructure and services should be finalised and implemented at a rapid pace.


End-users and prospective participants aspire that a robust regulatory framework needs to be put in place for the port sector so that all operators, public or private and all ports, major or non-major, have a level playing field.


Full mechanisation of cargo handling at ports should also focus on equipping all ports with futuristic systems such as automated container loading and unloading systems and container conveyor belts apart from standard international port facilities such as Roll On-Roll Off (RO-RO) berths, high-capacity-high-speed cranes, and dedicated terminals for each type of cargo (dry, wet, bulk, oil).


Also, in order to achieve the targeted growth of the Indian shipbuilding industry, it is almost mandatory that Special Economic Zones (SEZs) with the necessary infrastructure and additional support through subsidies and other encouragements are provided at the earliest to industry players.


The author is Programme Manager—Transportation and Logistics Practice, South Asia Middle East and North Africa, Frost & Sullivan.

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