It is difficult to comprehend why a country with a trade of over $70 billion has a minuscule shipping sector. Pakistan has just 10 ships at present and that too only in the government sector.

While the country is facing a major balance of payment problem, an estimated $4-5bn in foreign exchange is spent per annum on sea freight charges alone.

In addition, Pakistani seafarers are finding it difficult to get jobs in sea-going ships. There is an urgent need to correct this anomaly.

Under the United Nations Conference on Trade and Development (UNCTAD) 1964 rule, Pakistani ships can lift at least 40 per cent of export and import cargo.

Trade and shipping go hand in hand. This UNCTAD rule was incorporated by United Nations to improve trade of developing countries as at that time most of the shipping lines were owned by rich countries and they could manipulate trade accordingly.

With assured long term imports of crude oil, refined petroleum, liquefied natural gas (LNG), liquefied petroleum gas, coal and edible oil worth over $18bn, the government has leverage to mandate cargoes to be on a freight-on-board (FOB) basis with Pakistani flag vessels lifting it.

Pakistan National Shipping Corporation (PNSC) does transport crude oil imports of the country. However, with Pakistan State Oil buying refined products and LNG at cost-and-freight (C&F) basis, the advantage goes to foreign shipping lines.

Governments of many developing countries have tried to assist growth of domestic shipping by requiring all imports to be on an FOB basis. But, this affirmative action at times creates hindrances and delays.

This is an option that Pakistan can exercise, but prudence requires that initially a list of selected products be mandated to be brought on Pakistani vessels.

An innovative approach to this issue was adopted by Ethiopia in 2000. All imports transported by sea had to be carried by Ethiopian ships. This resulted in the land-locked country having more ships and seafarers than Pakistan.

The existing “Pakistan Merchant Marine Policy-2001” gave incentives to ship owners by exempting all kinds of import duties till 2020 but this had no result.

The reasons behind the stagnation are that the private sector is weary of poor government policies and lack of understanding of international shipping conventions by Pakistani authorities.

Inconsistency of polices, cumbersome procedures and the memory of 1974 nationalisation of private shipping companies are all factors that have contributed to the lack of growth.

A flag of a country under which a ship is registered in order to avoid financial charges or restrictive regulations in the owner’s country is called a flag of convenience.

An estimated $4-5bn in foreign exchange is spent per annum on sea freight charges alone

The benefits provided by flag of convenience countries are far more than those provided by Pakistan. Primary amongst them are convenient registration, ease of selling and buying ships and no questions asked for source of money. Consequently, there are a dozen ships owned by Pakistanis sailing under flags of convenience countries like Panama.

PNSC purchased and sold 19 ships till 2013 but for some unfathomed reason the then government imposed a duty of 38pc on import of ships and the national shipping corporation could not buy any ship after that.

This duty was lifted by 2016 and finally the present Government has bought a ship and another is in the pipeline for 2019.

Another issue which plagues the sector is the inadequacy of the bureaucracy that has fallen behind times and has capacity issues too serious to manage a competitive sector like shipping.

The Federal Bureau of Revenue and Pakistan Customs have also played a major role in deterring private investors in investing in ships.

Merchant marine policy is expiring next year and there is a need to improve it and promulgate it again for at least next 20 years. Pakistan is paying a hefty sum for its sea freight and the country can invoke the UN mandated rule of 40:40:20 that suggest cargo should be divided 40pc each to national vessels of the originating and destination countries.

PNSC carries crude at FOB basis but refined petroleum products are all transported through foreign flagged vessels at cost, insurance, and freight (CIF) basis. At least 14 medium sized tankers are required to be able to carry the entire cargo of refined products.

Foreign and local banks with assured availability of long term cargo and with a good return on investment should find it attractive to finance ships. The government on its part has to enforce that all refined petroleum products have to be carried on an FOB basis through national flag ships.

With Pakistan’s coal imports poised to increase from 11.5 million to 40mn tonnes in the next 5-6 years, a case can be made for another 3-4 ships to be inducted if the FOB clause is enforced.

On the same lines, edible oil import of over 3mn tonnes from Indonesia and Malaysia can be carried on own ships and 2-3 ships further can be inducted.

LNG ships have huge capital costs which on their own can cause balance of payment issues. Purchase of these ships therefore can be deferred for a couple of years.

The present set up at Ministry of Maritime Affairs has the right ideas and energy but it needs to take cognisance of the weaknesses in the capacity of the Mercantile Marine Department and make it technologically up-to-date and adequately manned with properly trained individuals.

With so much potential, there is no reason why the shipping sector cannot grow at a fast pace if the government incentivises the private sector to invest.

The writer is a vice admiral (retd) and director general at National Institute of Maritime Affairs
dgnima@bahria.edu.pk

Published in Dawn, The Business and Finance Weekly, May 27th, 2019

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