PAKISTAN’s shipping industry is facing severe challenges on multiple fronts. In addition to unfavourable market conditions, we also have had to grapple with our own shambolic shipping history.
Pakistan’s shipping industry has devolved to a point where there is only a single, government-owned, shipping company active in the market. Much of the misfortune which has befallen the indigenous shipping industry can be chalked down to two major events in Pakistan’s history, namely separation of East Pakistan and nationalisation policies of the seventies.
The forfeiture of the routes to East Pakistan and elimination of private enterprise led to a general loss of investor confidence in the local 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.
To further complicate matters, with the exception of Pakistan National Shipping Corporation (PNSC) there is no other local company operating in this domain. Foreign shipping companies have devoured the local market share. Moreover, these companies have large economies of scale and it is difficult to remain price competitive, as they have a higher threshold for withstanding financial pain.
The government has remained apathetic and unsupportive in this situation. An example worth highlighting is Pakistan’s LNG sector which has remained closed to the local shipping industry. The national planers, when initially negotiating LNG contracts, failed to take the local industry into consideration and instead opted to rely on foreign companies.
In order to restore Pakistan’s shipping industry to good health decisive action is required. Local industry and particularly PNSC, the last bastion of indigenous shipping in Pakistan, should be sheltered and protected from the global headwinds until it achieves the critical mass necessary for it to compete internationally.
Maritime laws should be enacted which give preference and protection to vessels flying Pakistan’s flag. Unlike the current Merchant Marine Policy, legislation should be drafted to explicitly enforce United Nation’s recommendations on shipping. These recommendations allocate 40pc cargo to each trading partner and 20pc to independent shippers, by adopting first right of refusal.
Furthermore, cargo preferences should be established favoring Pakistan owned and Pakistan chartered vessels. Additionally any cargos generated by an instrumentality of the government should be carried by domestic carriers.
Pakistan’s maritime industry is not alone in facing poor prospects. The global maritime industry has gotten tangled up in cumbersome regulations and a massive oversupply of vessels. Costs of compliance with regulations are inevitably increasing the cost of doing business. Meanwhile oversupply of vessels has become so dire that a report by OECD stated that future vessel requirements are expected to equal only in 2030 the peak of vessel completions that was reached in 2011.
All of these conditions have coalesced into a perfect buyer’s market. With opportunities for revenue enhancement limited and the cost of regulations and competition taking a toll, shipping companies across the world have unenviable prospects.
Shipping companies strained by perennially plummeting market conditions are always looking out to the horizon for new opportunities and for better, more efficient ships. The situation gets further exacerbated by the fact that governments of certain Asian countries keep subsidising both builders and buyers as an artificial means to keep their maritime economies chugging. All these conditions manifest themselves as an unintended oversupply of vessels, which ensures that freight rates remain low and the cycle continues unabated.
Ask any economist worth his salt and they will tell you that the right incentives (or disincentives) can solve almost any problem. The issue here is that due to the free hand given to the shipping industry and lack of cohesive global regulation (or incentives), everybody is acting shamelessly in their self-interest and therefore everybody is unwittingly contributing to the collective devastation of the market.
The writer is an adviser to the Karachi Chamber of Commerce and Industry
Published in Dawn, The Business and Finance Weekly, March 11th, 2019