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By Capt. Ranjith Weerasinghe, Chairman/Managing Director - Freedom of High Seas (Pvt) Ltd.

Contd from yesterday

Other development efforts in the shipping industry

With their government's encouragement, incentives, subsidies, international regulations they support, the eventual objective of keeping the larger business in their hands become more achievable. Only the gullible among our policy-makers and those who put self before the country break their backs and fall over each other to abide by that world order.

And the cream of Globalisation may be applied all over. It is now pertinent to have not only a Sri Lankan registration of vessels but for regional and coastal vessels a Sri Lankan government class so as to do away with international classification requirement for local vessels trading in coastal trade. Even a developed country such as Japan maintains Japanese Government Classification.(JG Coastal, JG Smooth sea etc) Even a country such as the Maldives has its own government classification for their vessels.

Any vessel complying with the regulations stipulated by her flag administration is considered a seaworthy vessel. The requirement of the Class as evolved from historical events is a commercial requirement in view of the relationship between insurance and classification societies. Therefore, the currently stipulated class requirement for locally owned coastal vessels is an additional expense for local ship owners.

Another development in the industry that had a bearing on vessel owning and operation was the liberalisation of bunker supply by private vessels (still CPC product only). As soon as CPC allowed private tankers to take delivery of bunkers for supplies out harbour, who ceased the opportunity first, a man who ran a small tanker in Singapore for years, not to mention sub-standard by Singapore standards reached by then.

It took a while before the local entrepreneurs took a cue from that. Today, bunkering in Colombo may not be a lucrative business for reasons well known. Half-baked liberalisation of bunkering wouldn't work. Now there are not enough vessels calling for bunkers. It is due to a combination of reasons, higher bunker prices in Colombo, Loss of bulk trade, Main container lines plying east west have optional ports such as Singapore and Middle East enroute, higher barge cost as a result of limited business.

Vessels' operating in the region have regular bulk supply contracts etc, Colombo's bunkering business is all but dying. It may be too late to revive, unless a huge local fleet emerges all of a sudden. Out of the few bunker vessels owned by local companies only one is fortunate to have a regular charter by CPC to fulfil the diesel oil requirement of the north.

Geographical position

With the geographical position so proudly pronounced comes the importance of positioning service vessels such as tugs and offshore vessels and floating docks and ship building and breaking facilities. It is an expensive business, not merely because breakingdown a vessel in mid sea is more expensive, but also due to irregular work available to them. Except for a few, that too in recent years, local ownership of such vessels was minimum. For these vessels to be operated profitably there must at least be day to day work for their upkeep and a few big jobs per year. Since we do not have such activities as marine escort tugs, protective towage, towage of supply barges, dredging work, marine development, offshore drill rigs and production platforms, there are only a handful of tugs and offshore vessels available here.

To make matters worse, whatever the marine development work available in the country would wholesale be given to foreign contractors. Any such projects coming up shall leave room for local companies to have long-term contracts whereby an investment could be made on the strength of the contract alone such that financiers could be made comfortable.

However there is work in the region for these type of vessels at various sites, competitive rates of vessels only can get the work. But our initial costs are high due to high financial costs as mentioned earlier; no special schemes and fiscal policies are available for ship finance in the country.

Operational costs of service vessels are high due to numerous reasons; first there are no affordable small ship building and repair facilities, regulatory requirements are stringent, Qualified crew costs are high, classification and statutory surveys and requirements are high, Insurance premiums are high as only re-insurance is done via local agents, maintenance costs are high, in and out port charges are high (service vessels need to move in and out of ports more frequently than any other ship calling ports) - in short, operational cost of small service vessels are high as all the said costs and charges applicable to them though are under local control, are levied in the same manner as for cargo ships.

There must be special provisions for service vessels in all aspects. Another important type of vessel in the Ship Services industry is floating Docks. None available in the country. This form of docking facility for small vessel owners is a blessing. Considering the number of small ships in the region, this has a ready market. Ship Breaking is another industry by itself we have not looked at carefully. Coastal and near coastal cargo and passenger vessels

At the time of CSC's fall, bits and pieces of coastal shipping were done by CSL, a subsidiary of CSC. Whether it is due to the lackadaisical attitude of the CSL or intentional manipulation one would not know, but the foreign owner of the small vessels chartered to CSL sought private sector partnership.

So he did it successfully. The fact remains though, that coastal shipping business was confined only to that company for a very long time thereafter. The availability of the business remained to be priced open. At present there is one local company with certain foreign participation which has managed to own a fleet of cargo vessels mainly engaged in coastal trade.

There is also one vessel ownership engaged in the same trade. In the coastal passenger transport there is one vessel ownership.

These vessels confined to the Colombo-Jaffna trade are riding a rough ride through tumultuous weather of various restrictions in the name of security and other reasons, hampered by long delays in loading and discharging processes, long turn around time due to lack of proper discharging facilities at PPD.

The high cost of goods in the Northern peninsula were attributed to the high freight rates charged by these vessels, but failed to enhance provisions required for shortening the voyage duration which usually takes months instead of a few days. It can be proved that a 3000MT cargo ship cannot be operated profitably to the north with lower freight rates if the turn around time remains the same.

The only fleet operator may be just managing as their entry to the trade is as old as the war in the north. They may have recovered the initial costs during the time. But for a new entrant to the trade, it could be tough with the current freight rates and longer turn around time amidst all the restrictions imposed and clearances required. The local coastal shipping business is well guarded against the public, in the name of security, as an untouchable by various sections including politicians, government officials, traders, cargo and vessel operators and charterers and whosoever has some interest in it.

National Ports and Shipping Policy of Sri Lanka

It is interesting to note that the National Ports and Shipping Policy of Sri Lanka formulated in 1997 has clearly identified the ship owning and operations as one of the key elements of development of shipping sector in Sri Lanka. Each and every section in the document titled National Ports and Shipping Policy of Sri Lanka starts with policy statement followed by Macroeconomic objectives and Microeconomic objectives and measures recommenced.

Each policy statement starts with wording it is the policy of the government to encourage.......? But nearly four years after this encouragement, not even a resemblance of practical solutions are in the visible horizon. It now seems to be the turn of the industry to demand the practical implementation of the policies, unless it is considered buried with the man who gave the leadership in formulating the National Policy. In which case we have to start afresh without delay.

What must be done

First and foremost, we must identify our problems in the industry, which in concise form would be as follows:

1. Our shipping industry has evolved as an agency based business and not as ship owning industry The Agency based industry has created a culture that has almost formed the national policy on shipping, protective of progressive vision to expand in to ship operating business.

2. Within the closed economy, the concept of National Shipping Lines to own a national fleet and promoting the same only has completely discourage the private vessel ownership.

3. At the time of liberalising the economy and hence the shipping industry, doing away with Freight Bureau the local industrialist was not ready, as the country's private capital base had been destroyed by that time. Various foreign shipping lines grabbed the opportunity whilst only the agency work continued. The Status quo has prevailed for such a long time, people have forgotten what the shipping industry should look like.

4. The required encouragement for ship owning in the form of national policy is not available. The expertise required to identify what should have been our shipping industry and its potential for the economy of the country has been very poor within progressive governments for too longer time. This relates to various regulatory requirements

5. The banks and financial sector has not been fully aware of ship finance as a result of lack of fiscal policy directives. The ignorance of the legal documents pertaining to the ownership and registration of a vessel and their strengths as far as the title ownership to accept as a co-lateral as similar to those acceptable properties.

In the search of a solution, we see a resemblance of the first step has already been taken in formulating the National Policy of Ports and Shipping in Sri Lanka. Let us first look at what was prescribed by the National Policy. In its Section 5 under the heading, Developing National Merchant Shipping Fleets, the government had decided to do the following:

* Encourage the financial sector to create ship finance portfolio at rates that compare favourably with international lending rates

* Obtain through Government bilateral negotiations and pass down to local entrepreneurs the benefit of ship building subsidies available in maritime nations

* Provide pioneering status and other encouragement for local investments in the acquisition of ships

* Co-ordinating with the funding agencies for the promotion of skills development in ship owning, operating and management at all levels

* Investment relief to be provided for all capital invested for a suitable period of time

* Exempt Sri Lankan seafarers from PAYE tax

* Remove capital gain tax on sale and purchase of ships provided funds are reinvested in any area of the maritime industry

* Five Year Plan for National Fleet of 100 Ships

The above list alone is marvellous. But then none of it is implemented and time is running out. Therefore it is paramount now to look at the whole thing in a completely new perspective. Knowing the economic benefits of the industry it is time to launch a new accelerated program under the relevant ministry perhaps naming Five Year Plan for National Fleet of 100 Ships. It might sound like 200 Garment Factories Project which was given similar propulsion and encouragement. Well if one is cynical about it, please do a better job.

It can start with the implementation of policies recommended in the National Policy of Shipping plus other measures as follows:

1. Starting from number one, ship finance by local finance sector by taking the ship the as co-lateral is to be brought in to the finance culture of the country

2. Start with suitable second hand ships or pass down Ship Building Subsidies to private sector. Local ship building at international prices shall not be the way.

3. Dollar loans at very low interest rates must be made available.

4. The clear target of 100 ships in five years should be made public and all private sector companies in various other sectors too shall be encouraged to participate.

5. Not only Pioneering status, but also as a special project, all forms of taxes, GST, NSL and Custom duties should be waived for minimum 5-year period.

6. If one looks at the financial reports of some big local companies, their tax component alone is worth a few second hand ships of around 5000 Dwt. So if they are encouraged with the necessary investment relief, to go for such a venture with that tax component, won't they be happy, because as soon as they purchase the vessel, their initial cost is zero.

They could compete like no other. Perhaps, the government may not be happy because the tax must be collected and used by the state for the people. Isn't there another way around. Can't that tax component be directly invested by the private sector for special projects like this thereby giving it to the people by way of employment and related economic activity instead of the tax being channeled via state for similar end results. 7. Sri Lanka Registry of Shipping shall be incorporated in order to issue two types of trading certificates - 1. local survey certificates for local coastal ships doing away with international class requirement and unnecessary international certificate requirements, 2. International trading certificates as per IMO conventions for international voyages.

There must be government mechanisms, open or hidden still within open economic parameters to ensure priority and fair business to local ship owners in the following available work which they should do at lesser cost (most countries have some arrangements to protect their industries one way or the other non level field, regardless of the fashionable Globalisation pretense):

* Container Feeder operations

* Coastal and Regional break bulk shipping

* Bulk oil imports by CPC and Gas imports by Shell

* Wheat imports by CWE to Flour Mill in Trinco

* Bulk Cement imports by local bagging plants in Colombo and Galle

* Raw materials imports by local cement factories in Galle and Trinco

* Dry food provisions import by Govt establishments and private sector.

* Raw materials for garment industry

* Project cargo for various new BOI and Non BOI projects

* Project cargo of raw materials and equipment for development projects of the government.

* Metal scrap exports and steel imports

* Tourist transport and lodging around the coast

* Passenger vessels in the near coastal/regional trade

The above list by no means is exhaustive.

Next look at the second hand vessel market. An attempt is made to work out below the operation of 100 second hand ships valued under 2 million Dollars each.

Over a spectrum of vessels from 500 DWT to 5000 DWT ranging from 12 to 20 years we could see the market price range is about US$ 200,000 to 2,000,000. Roughly averaging US$ one million. As a very rough average of all such vessels daily earning capacity can be put down as a minimum of US$ 3500. It can easily set aside an average of about US$ 1500 per day for loan and interest payment if required.

In the 100 ships projects, we are looking at earnings of US$ 350,000 per day or 10,500,000 per month or 126,000,000 per annum. In SL Rupees it is nearly 10,836,000,000 per annum. In addition, the earnings by shore and afloat employees, affiliated industries, service providers and savings by service receivers as well as the development of the knowledge base and the asset base of the country are of immense value. Compare this with any development project or investment.

One hundred ships with initial cost of 100 million dollars, capable of recovering the investment within 12 to 24 months, capable of creating substantial economic activity within and out side the shipping industry, with the scope of expansion beyond the regional boundaries.

May we have better prospects in the shipping industry, with the contribution of everyone who would earnestly wish a brighter future for this country.

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