Solutions to maritime financing blues

Maritime suffers from not only policy implementation problems, but from finance availability. Sanjeev Gupta recommends that the ports, shipping, shipbuilding and inland waterways should be bundled and a new financing entity be constituted exclusively for this purpose.

The fact that 95 per cent of the country’s trade by volume and 70 per cent by value moves by sea. is indicative of its importance: India’s long coast­line of 7,517 km, strategic location on the world trade map, robust economic growth outlook, cost competitive workforce, availability of natural resources are some of the natural advantages. Yet, India is only the 20th larg­est maritime country in the world in terms of shipping tonnage and global order booking via sea.

Maritime financing covers a variety of transactions involving the commercial activities include buying and purchasing of ships, development or repairing of gadgets and instrumentations, and even more marine insurance and law payments etc.

There are a lot parties involved in the domain of maritime financing. Some of these parties are conven­tionally established in their method of operational acti­vities while ship finance operators are unconventional yet established in their own singular way. This difference existing between the many available ship financiers creates a wide array of feasibility for the people requiring maritime financial aid. These are given in Figure 1.

Major constraints in the maritime sector growth

Ports: Ports in India are leading the countries growth in the international arena. India is constantly witnessing a significant growth in cargo traffic. Increase in traffic is the major problem which is being faced today and which is resulting into capacity utilisation constraint. Four out of 12 major (Centre-governed) ports are experiencing more than 100 per cent utilisa­tion namely Visakhapatnam, Tuticorin, Mormugao and Mumbai. The other eight ports are also facing capacity utilisation constraints, being utilised more than the optimum accepted range of 70 to 75 per cent.

Therefore, there is an urgent need of capacity addition so that Indian ports can handle the increased cargo traffic in future. Further, the capacity utilisation at non-major ports was 77 per cent in 2009-10. Figure 2 shows the capacity utilisation of the major ports in India during 2009-10.

Shipping: In terms of fleet size the Indian shipping industry is presently 10 million GT and forms a marginal share of just above 1 per cent of the global fleet. While the Indian seaborne trade has been growing at a rate of 12.25 per cent, the share of Indian ships in carriage of the country’s overseas trade has been declining over the years despite the total volume of cargo moving in India’s trade expanding progressively. One of the primary reasons for the declining trend in its share has been the inadequate growth of the Indian fleet, which is not commensurate with the growth of the Indian seaborne trade.

Shipbuilding and repair: The ship repair activities in India are regulated through designated Ship Repair Units (SRUs) registered and licensed by the DG Shipping. The maximum size of vessel, which can be built in India in the public sector, is 110,000 DWT at Cochin Shipyard and 80,000 DWT at Hindustan Shipyard. These vessel sizes are relatively small compared to the current trend of building large size vessels worldwide. The gaps in the promotion of ship building and repair can be identified as follows:

i) Manufacturing gap;
ii) Technology gap,
iii) Resources gap and
iv) Skill Development gap

Inland water transport: Inland Water Transport (IWT) is a fuel efficient, environment friendly and cost-effective mode of transport (especially for bulk goods, hazardous goods and over dimensional cargo) having potential to supplement the over burdened rail and congested roads. However, the development of this mode has been grossly neglected for a long time and consequently, the share of IWT today is just 0.4 per cent (in terms of tonne-km). Inland waterways face the following three major constraints in emerging as commercially viable transport mode especially in terms of infrastructure facilities in India:

i) Depth and width: Required for movement of inland vessels for round the year operation;
ii) Terminals: For loading and unloading of cargo; and
iii) Navigation aid: For safe navigation during day and night.

Challenges in maritime financing

Investment required in this sector has grown at a rapid pace commensurate with India’s economic growth. The investment requirement until 2020 is described in Figure 3.

Asset-liability mismatch: Banks have remained in the forefront of the infrastructure finance in India with a contribution of Rs 270,000 crore of total infrastructure financing as in 2010-11. This is further accentuated by the fact that other specialised infrastructure financing bodies are yet to take the leadership in maritime financing. The typical requirement of mari­time projects remains around 20 years (door-to-door). However, banks have an average deposit period not exceeding 2-3 years. This obviously restricts term lend­ing of long duration and results in huge asset-liability mismatch for the banks.

On greater scrutiny it becomes more clear as the major source of banks’ own funds availability is from their Current & Saving Account Deposits (CASA). Only a portion of this can be treated as long term. Further, term lending of this total long term deposit is restricted to 20 per cent. Thus, the available funds for long tenor maritime projects financing are getting constantly constrained.

Absence of takeout financing: Banks have led the initial risk period financing of the infrastructure sector till now. However, in the absence of an efficient takeout mechanism their sectoral caps have been breached as even after the commissioning of the project, the financed assets remain in the books of the initial lender. Once the commissioning of the infrastructure project is complete and it starts generating cash flows, it is expected that takeout lenders like IIFCL, IL&FS, IDFC or others may take over the asset and hold it for the long term tenor of the repayment of the loan. An example is the Karaikal port, which has obtained approval for takeout finance from IIFCL.

Further, this model has to remain as a win-win model for the banks and takeout lenders such that both have the benefit of the qualitative and return producing financed assets. In the absence of an effective takeout finance, long term maritime financing remain under threat. Similarly, the bond market has not been cataly­sed in India till date. This continues to keep the chocked infrastructure sectoral caps at the banks under pressure without any option of releasing the Cash Flow Producing Financed Asset in the secondary market through a structured bond product.

Sectoral caps: Maritime sector financing is included in the overall infrastructure sectoral caps of the banks. The infrastructure sectoral caps of most of the banks have already reached the brim, courtesy the huge volume and rush of power sector projects.

Even otherwise the available funds for infrastructure financing are deeply curtailed due to the following reservations:

a) 70 per cent of the raised deposits only are lent by the banks due to the various regulatory norms (including regulated ratios like CRR, SLR etc)
b) Further, out of the total lendable funds 40 per cent are allocated for Priority Sector (which includes agriculture, small scale etc), not available for infra­structure lending till now.

Absence of specialised lender: PFC, REC, IREDA and PTC Financial Services have contributed more than Rs 150,000 crore of power sector financing of the Country having raised money from domestic as well as foreign sources. However, India lacks a focused and specialised shipping sector financing body. This causes further constraints on the availability of funds for both project financing and the working capital requirement of the shipping sector.

Critical success factors in financing

The government has already taken note of the importance of maritime financing and initiated certain steps to ensure the adequate availability of funds to this sector. However there is still a slip between the proverbial cup and the lip.

Ports

i) Private sector participation: The government has been encouraging private sector participation in Maritime development since1996. The major areas which have been thrown open for private investment, mainly on Build, Operate and Transfer (BOT) basis with revenue sharing mechanism which include construction of cargo handling berths, container terminals and warehousing facilities, installation of cargo handling equipment, construction of dry-docks and ship repair facilities, etc. The preferred route for private sector participation is through Open Competitive Bidding.
ii) Foreign direct investment: FDI up to 100 per cent is permitted for construction and maintenance of ports and harbours. This must be appropri­ately publicised.

Shipping sector

i) Increasing Indian tonnage: A clear policy to support the growth of an indigenous fleet needs to be formulated. It is proposed that the cabotage should be continued and the fiscal/tax regime be rationalised so as to attract fresh tonnage in to Indian registry. This is to be supported by a policy that would sustain existing tonnage, make investment in shipping attractive to
new investors and provide special incentives aimed at energy security needs.
ii) Legislative updation: With the rapid changes in the International Maritime Regulatory level, and as a result of adoption of various maritime IMO/ILO conventions, it becomes imperative to constantly update our national legislation, in order to keep pace with the international regulatory measures. A greater emphasis is required to bring in all new IMO instruments into the national law, for an effective implementation.

It is envisioned that the period between the adoption of international convention and national legislation be reduced to three years by 2015 and to one year by 2020.

Shipbuilding/ship repair sector

i) Introduction of new shipbuilding subsidy scheme: In order to provide a level playing field to the indigenous shipbuilding industry which needs a continuous flow of orders a new shipbuilding subsidy scheme is under consideration for neutralisation of various taxes and duties imposed on shipbuilding industry. It is proposed to achieve 5 per cent share in the new order book position in the global market by 2020. This subsidy scheme must be approved at the earliest.
ii) Grant of infrastructure status: A proposal for grant of infrastructure status to shipbuilding industry has been forwarded to Ministry of Finance. It is expected that with the grant of infrastructure status the indigenous shipbuilding industry would be able to utilise the tax benefits and availability of easy credit for improvement in the technological development, infrastructural facilities and modernisation. An early approval of this infrastructure status to ship building/ship repair industry shall be in the national interest of India.

Inland water transport sector

i) Public investment: Public investment in IWT sector is negligible vis-a-vis road, rail and aviation sector. It is felt that for reaching threshold level of IWT development to make the waterways commercially viable, there ought to be quantum jump in public funding in IWT sector. There would be a requirement of around Rs 10,000 crore by 2020 in terms of budgetary support. Public investment needs to be catalysed to appropriately build this sector.
ii) Private participation: To promote inland water transport, there is a need for private participation in IWT infrastructure. Development of stretches of nati­onal waterways those are commercially viable and have potential for private participation are to be considered for development through PPP mode initially. It is proposed to raise 60 per cent of cost of these IWT projects through private participation which would be around Rs 20,000 crore. Appropriate incentives (including tax and others) should be structured to attract private sector participation in the proposed inland water transport infrastructure development.

Specialised sector focused lenders

i) Catalyse the setting up of maritime financing corporation: The main objective of such a financing corporation can be providing funds to maritime and maritime led developments. Later the corporation also can sponsor an equity fund for the purpose of equity funding to major and minor maritime and maritime led development in public, private and PPP models. This can further catalyse the maritime and maritime related growth in the country. Ultimately, it shall result in more rapid economic growth in India.
ii) Accord “Priority Sector” status to infrastructure: Forty per cent of the bank’s deposits are reserved for the priority sector lending. Therefore, according the priority sector status to infrastructure would make a lot of funds available to develop the infrastructure in the country.

Credit enhancement mechanism: Credit enhan­cement mechanism should be created that would enable banks to manage capital constraints. Thereafter, banks can enhance credit at the end of the initial years. Like in the US, increased off-take of infra bonds witnessed through credit enhancement mechanism.

Standardisation of bidding procedure: It would ensure the efficiency, predictability and single-window approval. The PPP sponsoring agencies should utilise the available knowledge on best practices related to identification, development, procurement and contract management of the project.

The author is Managing Director, NEXGEN Financial Solutions Pvt Ltd, a merchant banker focused on infrastructure and specially on Gujarat’s infrastructure financing.