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Construction : Ports | December 2015 | Source : Infrastructure Today

Old wine in a new bottle?

While relaxation of the Indian cabotage policy is being observed as a gateway of opportunities, investment in infrastructure and higher logistics costs are believed to be some of the major deterrents.
Until recently, Indian cabotage norms allowed foreign ships or ships not chartered by non-citizens to trade on multiple ports on the Indian coastline only if specifically licensed to do so, granted by the Directorate General of Shipping (DGS) under Section 407 of the Merchant Shipping Act, 1958. The practice was to grant licences only if suitable Indian-flagged tonnage were unavailable. This practice has been controversial but any changes proposed were equally so, given that a country´s cabotage policy has a significant bearing on the country´s coastal shipping.

Liberalisation in the cabotage law would give Indian ports an opportunity to become large transshipment hubs, especially deep-water ports in the south, which are closest to the main east-west shipping lane. This impetus is required particularly since the eastern coastline isn´t faring as well when compared to the western coastline. According to data produced by the shipping cell, during the period from July to December 2014, India´s major western ports handled 4.15 million 20-foot-equivalent units. While, in the same period, ports on the country´s east coast moved just 1.35 million TEUs. Currently, in the case of containerised cargo, the practice has been to transship cargo outside India first, thereby diverting cargo to ports of neighbouring countries. When the draft policy on cabotage inviting comments from the public was circulated on 3 July 2015, the Container Shipping Lines´ Association of India stated that if cabotage restrictions were removed, logistics costs for end customers will be at least 40 to 45 per cent cheaper on the sea leg of the transport. This would result in a direct benefit to the Indian trade to the tune of around $100 million per year. On the other end of the spectrum, the Indian National Ship Owners´ Association (INSA) considers the absence of absolute cabotage the major reason for low investments in coastal shipping and strongly opposes the move of relaxing the cabotage law, arguing that this will not give a level playing ground for Indian players. Consequently, INSA has opposed any relaxation of current cabotage law by arguing that this move would potentially undermine the position of the domestic shipping industry in coastal trading.

Previous Cabotage Regime
Historically, cabotage restrictions in India have been relaxed from time to time as Section 407 (3) of the Act inter alia empowers the Central Government to relax cabotage restriction in respect of any part of the coasting trade of India. Accordingly- From 1992 - 1997: In order to attract foreign mainline vessels to the Indian Ports, cabotage laws had been relaxed for a period of 5 years from 1992 up to 1997 for container vessels and lash barges. The amendment had one pre-condition that the containers should have directly come into the country of export without any transshipment. For instance, if a ship brought 10 containers from Germany to India without breaking the journey in between, it could transport these from the major port to smaller ports along the coast.

Despite this slight relaxation during 1992-1997, during the period between 1990 and 2000, only 78 million tonnes of cargo was transported by coastal shipping in India. This does not fare well compared with China, which shipped 870 million tonne, or Indonesia, which shipped approximately 133 million tonne in the same period. In the final year, it was decided to discontinue this dispensation due to the absence of sufficient infrastructural facilities. However, stakeholders believe that policy regime restricted to too few types of vessels make no significant difference.

From 2012-2015: In September 2012, cabinet decision on the cabotage relaxation at Vallarpadam facility was for only the foreign-owned and foreign-registered container ships out or in out or in through the international container transshipment terminal, or ICTT, at Vallarpadam in Cochin port on the country´s western coast.

However, despite significant investment in the development of the ICTT port by the port operator, the cabotage relaxation has not produced the expected results largely due to factors such as recession in the industry post 2009, lack of interest from mainline shipping lines, labour problems, absence of sufficient cargo support, higher cost of road transport to the ICTT and expansion of and competitive pricing provided by the Colombo port. Further, lack of clarity with over jurisdictional issues that affected the clearance of trans-shipment containers led to differences between governmental agencies.

Case for liberalisation
Internationally, many states, particularly within Asia, have relaxed their cabotage policy, yielding positive results. In 2003, South Korea eliminated transshipment fee and relaxed its cabotage regime to attract more Asian container traffic. This resulted in six foreign shipping lines entering the market and reducing the shipping rate. In 2009, Malaysia relaxed its cabotage laws, permitting foreign shipping vessels to transport cargo along the Malaysian coast. As a result, the port of Tanjun Pelepas, a mere 50 nautical miles from a global shipping hub, Singapore, increased container traffic from 5.6 million TEUs to 7.5 million TEUs.

Presently, against a share of 9 per cent of railways and 6 per cent of roads in the GDP, the share of ports is only 1 per cent. In addition, high logistics costs make Indian exports uncompetitive. This is because EXIM cargo is being shipped through cheaper and technologically advanced ports of Dubai, Singapore and Colombo. Shipping lines prefer calling majority of their services at these ports and onward connections are then made on India services.

Although, it has been argued that the liberalisation of the cabotage regime would hamper the growth of Indian tonnage, in the long run liberalising the cabotage policy would likely result in the creation of demand for coastal shipping which would be, in turn, beneficial. Permitting coastal shipping would allow Indian ports to gain a competitive edge over other maritime states in the same way that Malaysia was able to divert the coastal shipping influx from Singapore. Apart from this, it would also encourage Indian shipping companies to compete with foreign shipping lines on service, quality, pricing, and operational performance. The development of such a conducive market environment could then possibly lead to:
a.a larger opportunity to reduce reliance on road and/or railways to coastal shipping,
b.environmental benefits arising from the transfer of some traffic from land transport, and
c.national shipping fleets with international competitiveness contributing to long term stability and efficiency of shipping services.

Liberalisation of Cabotage Policy
After much deliberation, the Government of India has decided to relax the cabotage policy effective from 2 September 2015 for a period of five years. Under this policy, after obtaining a one-time permission from the DGS for operating in Indian Coastal Waters, foreign vessels being roll-on roll-off (roro), hybrid ro-ro, ro-pax, pure car carriers, pure car and truck carriers, LNG vessels and over-dimensional cargo or project cargo carriers, may engage in domestic coastal shipping.

It is interesting to note however, when the draft policy inviting comments from the public was released in 3 July 2015, there were certain differences- it focussed on development of shipping along the eastern coast, from Kolkata to Chennai in respect of empties and EXIM containerised cargo for a period of three years. In return, a differential charge of USD 50 per TEU was to be levied on foreign vessels transshipping EXIM containerised cargo and USD 25 per TEU for transshipping empties along the east coast. Further, given that Indian ports handle more than 90 per cent of India´s total EXIM trade volume (of which 20 per cent is transshipped through foreign ports such as Colombo, Dubai, etc.), the inclusion of the EXIM containerised cargo (sans any differential charges) into the liberalised cabotage policy would have served as an impetus to the growth of the shipping industry. While the draft policy focussed intensely on development of the eastern coastline, there has been no mention of the same in the policy and no reason for its non-inclusion.

The policy, though a welcome step, stops short of being truly effective and the ICTT case can be used as a roadmap for the future. This policy should be met with investment in infrastructural facilities at ports. Effort should be made to reduce the cost of transportation to and from ports. Further, for the policy to produce the desired result, it should be effective for a longer period of time. As seen from the case of ICTT, a short term policy invites significant investment and interest but an adequate gestation period for the returns on the heavy investment to flow are essential for effectiveness. Another lacuna visible is that tax breaks given to domestic shipping companies have not been rolled out to the foreign shipping companies as a by-product of the new cabotage regime, for example, fuel subsidy given to Indian car carriers are currently not applicable to foreign vessels.

In conclusion, a co-ordinated effort among various governmental departments with respect to ancillary functions (for example transshipment procedures) together with making port tariffs competitive appears to be the need of the hour in order to not only permit foreign vessels to ply between domestic ports, but also to give an impetus to domestic shipping companies, allowing for a more competitive shipping industry, domestically and internationally. This, in turn, could mean the difference in whether this policy sinks or swims.

This article has been authored by Aakanksha Joshi, who is an Associate Partner and Tarini Menezes, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

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