Flag protection an economic opportunity

Any country, when drafting its maritime policies, is faced with a dilemma that is similar in nature to most other economic matters. These countries have to choose between a protectionist stance and adopt flag protection policies or opt for openness and inclusivity allowing all individuals who choose to enter the market the opportunity to indulge in free competition.

Although, openness clearly has merits and is largely responsible for the sustainable growth achieved by the West, it is not a one-size-fits-all approach. Freeing up an underdeveloped market and opening it up to free market forces, in certain conditions, might yield undesirable results such as lack of local labor development as well as the dearth of essential services which are crucial yet unprofitable.

The opposite is true as well; monopolizing and restraining the market is bound to fare badly which will eventually result in stigmatizing growth and disincentivizing new investment. However, neither can compare to the third economic malady which afflicts Pakistan’s shipping industry. Non-committal policies of the past, switching between nationalist and private strategies along with the Pakistan’s high ranking in the ‘unease’ of doing business have left the market devoid of stability, the one crucial factor all investors yearn for. A viable and sustainable national fleet in line with Pakistan’s economic potential and national security is the need of the hour particularly when considering the recent foreign investment programs jointly being implemented by the Chinese and Saudis.

How we got here?

Pakistan has a long history in shipping starting from 1947 when Quaid-e-Azam Muhammad Ali Jinnah asked Rustom Cowasjee along with Muhammad Ali Habib to assist in the formation of the first Pakistani shipping company which would come to be known as the Muhammadi Steamship Co. Ltd. By the early sixties there were 7 prominent Pakistani shipping companies.

Since those days Pakistan’s shipping industry has not come very far. In fact, one can argue that it has devolved to a point where there is only a single, government owned, Pakistani shipping company is active in the market. Much of the misfortunes which have befallen the indigenous shipping industry since then can be chalked down to two major events in Pakistan’s history, namely separation of East Pakistan (read Bangladesh) and nationalization of private shipping companies during the seventies. Pakistan’s breakup led to the end of trade between the two wings of Pakistan upon which the local shipping industry was heavily reliant. The second blow came in the form of nationalization which effectively eliminated private enterprise and led to a general loss of investor confidence in the shipping industry. Despite various interspersed attempts by Pakistan’s government over the years, Pakistan’s shipping industry still hasn’t recovered from the devastation wrought by these two events.

The Merchant Marine Policy 2001 is the government’s most recent and forceful attempt to rectify the problems in the local shipping industry. The Merchant Marine Policy 2001 specified a number of measures for reviving the shipping industry. They included, inter alia, exemption from import duties and surcharges for ships and all floating crafts purchased by a Pakistani entity or flying the Pakistani flag, prescription of tonnage tax in lieu of income tax, cargo preference for Pakistan National Shipping Corporation (PNSC) & Pakistani flagged vessels as well as Pakistani vessels having preference for transportation of cargo and passengers in voyages restricted to coastal operations only. However, the said policy has now become stale and requires urgent revamping to bring it in line with the requirements of modern maritime trade. It may also be pertinent to add that despite the provisions of the said policy, the private sector could not be attracted towards this extremely important sector that is responsible for enabling international trade.

What is the global practice?

Shipping facilitates trade. Countries which have a large shipping sector are economically strong and developed. The UN in 1964 with an aim to help the poorer countries develop their shipping sector and compete with developed countries allowed a role in Maritime transportation by making a provision of 40/40/20 rule, also known as the UNCTAD Code within the maritime circles. This rule allowed carrying of 40% cargo to each trading partner and 20% to Independent shippers.

India has implemented a flag protection policy, which gives Indian ship-owners flying the Indian Flag, “first right of refusal”. However in case an importer moving cargo for domestic entities receives bids from foreign and local ship owners, technically acceptable Indian ship owners will be asked to match the rate quoted by foreign ship owners. If they do not match the rate, Contract of Affreightment (COA) will be awarded to the foreign company.

As per India’s Merchant Shipping Act, 1958, only Indian flagged vessels or vessels chartered by an Indian citizen or company operating under a license granted by the Director General of Shipping, can carry cargo or passengers from one Indian port to another Indian port. Foreign flag vessels are permitted only if Indian flagged vessels are not available.

The Bangladesh Flag Vessels (Protection) Ordinance, 1982 specifies that, at least forty percent of sea-borne cargoes relating to foreign trade of Bangladesh shall, subject to the other provisions of this Ordinance, be carried by Bangladesh flag vessels. However this limitation does not apply to any cargo required to be carried in accordance with any reciprocal agreement made between two trading partners or cargo in respect of which a specific or general certificate of waiver has been obtained. It should be noted that the Bangladeshi government plans to revise the seaborne cargo to sixty percent upon passing of the proposed act by parliament.

The Bangladesh Flag Vessels (Protection) Ordinance, 1982 further specifies that no flag vessel of any foreign country shall carry costal trade (known as cabotage in maritime circles) cargoes of Bangladesh, unless a certificate of waiver is issued by the Director General, Department of Shipping.

The United States’ Military Cargo Preference Act of 1904 requires that 100% of cargos bought for the Army, Navy, Air Force or Marine Corps be carried on board US flag vessels. Charges for such transportation are limited to charges made for transporting like goods for private persons.

The Cargo Preference Act of 1954 requires US flag vessel participation in the carriage of the United States government impelled cargoes. The 1954 Act requires that 75% of the volume of government-impelled cargoes (including humanitarian assistance and agricultural commodities) be transported in privately-owned US-registered vessels, but only to the extent that such vessels are reasonably available at fair and reasonable rates.

As per Public Resolution 17, all cargoes generated by an instrumentality of the government are shipped 100% on US Flag vessels. This applies to shipping on transactions generated by the Export Import Bank of the United States.

The Maritime Security Act of 1996, extended through National Defense Authorization Act, 2013 establishes a fleet of active, commercially viable, militarily useful, privately-owned vessels to meet national defense and other security requirements. All Maritime Security Program (MSP) operating agreements are currently filled by 60 ships. Participating operators are required to make their ships and commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency.

The MSP maintains a modern US-flag fleet providing military access to vessels and vessel capacity, as well as a total global, intermodal transportation network. This network includes not only vessels, but logistics management services, infrastructure, terminals facilities and U.S. citizen merchant mariners to crew the government owned/controlled and commercial fleets.

What can be done locally?

There is no simple solution to fix Pakistan’s shipping industry. With the exception of PNSC there is no other local company operating in this domain. Foreign shipping companies have devoured the local market share. Even if local private enterprises were to compete directly, in the cut-throat and highly regulated world of international shipping, foreign companies have large economies of scale and it would be hard to remain price competitive as these companies have a higher threshold for withstanding financial pain.

There are other concerns as well. For the sake of Pakistan’s national security a national fleet, free from influence of foreign actors, which would be able to continue its operations to transport vital goods and ensure that the economy keeps churning even in the direst of circumstances, is of the utmost priority. Similarly the national fleet should logically be manned by the local population. In order to ensure that a national fleet is maintained and local mariners are available in sufficient numbers to man the fleet, financially self-sufficient shipping companies, which offer sufficient remuneration to attract and retain their employees, is paramount.

In order to restore Pakistan’s shipping industry to good health decisive action is required. Like a sapling in a greenhouse, Pakistan’s shipping should be nurtured and protected until it achieves the critical mass necessary for it to compete globally unfettered. Therefore, Pakistan’s shipping industry and particularly PNSC, the last bastion of indigenous shipping in Pakistan, should be sheltered and given the right conditions to thrive. Maritime laws should be implemented which give preference and protection to vessels flying Pakistan’s flag.

An example worth highlighting is the Pakistani LNG sector that has, very unfortunately, remained closed for the Pakistan flag. It is unfortunate to note that the national planners when initially negotiating LNG contracts failed to take into consideration and learn from experiences and examples of other countries engaged in the LNG trade. This oversight on the part of the planners at that time borders incompetence. Had they sat up and paid attention, they would not have had to venture far. A neighbor across the border could have provided them relevant directions pointed towards self-sufficiency. The said neighbor has ensured that their local LNG shipping capacity is developed by way of mandating their state-owned shipping line to participate in this vital sector thus ensuring that their national strategic interests are appropriately addressed. It is incomprehensible to note why our planners could not have adopted a long-term strategic approach.

While the measures taken by Merchant Marine Policy 2001 were steps in the right direction, they failed to produce the desired results. This is largely because one of the most important provisions of the Policy regarding cargo preference remains largely unimplemented due to the fact that it is a Policy and not a law which is enforceable on all seaborne cargos coming into or going out of Pakistan. The government needs to grant legislative protection to the shipping industry by ensuring cargo preference for Pakistani flagged vessels by all Pakistani businesses and exporters/importers.

Unlike the current Merchant Marine Policy 2001, the legislation should explicitly enforce UN recommendations on shipping through 40/40/20 rule by adopting first right of refusal. Furthermore, a cargo preference should be established favoring Pakistan-owned vessels, Pakistan chartered vessels, chartered vessels flying the Pakistan flag and foreign flag vessels in that order. Additionally, any cargos generated by an instrumentality of the government should be carried by Pakistan flag carriers.

The current situation of Pakistan’s shipping industry and for its promising future, an apt quote by Winston Churchill comes to mind. ‘Success is stumbling from failure to failure with no loss of enthusiasm’.

(The writer is an advisor to the Karachi Chamber of Commerce)

E-mail: captshah1@hotmail.com