National Institute of Maritime Affairs (NIMA) Bahria University, Pakistan

NIMA POLICY BRIEF Series # 001 January 2019

Review Paper

PROTECTION AND PROMOTION OF NATIONAL FLAG CARRIER – PNSC: POLICY OPTIONS FOR PAKISTAN

Authors: Syed Khawar Ali Shah Kanwar Muhammad Javed Iqbal

First Edition

National Institute of Maritime Affairs (NIMA) Bahria University, Pakistan

Category: Policy Brief

Title: Protection and Promotion of National Flag Carrier - PNSC: Policy Options for Pakistan

Author: Syed Khawar Ali Shah* Kanwar Muhammad Javed Iqbal**

Reviewed by: Baber Bilal Haider, Director, NIMA Muhammad Nadeem, Deputy Director, NIMA

First Edition: January 2019

Property Rights: National Institute of Maritime Affairs, Islamabad

* Vice Admiral (R) and Director General at National Institute of Maritime Affairs (NIMA) reachable at [email protected] ** Senior Researcher at National Institute of Maritime Affairs (NIMA) reachable at [email protected]

All rights reserved. No part of this Policy Brief may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or information storage and retrieval system, without prior written permission of the publisher.

A publication of the National Institute of Maritime Affairs (NIMA) - an independent and non-profit think tank.

In the Policy Paper / Brief series, the NIMA publishes solicited / unsolicited policy advice on practical policy issues in the sphere of maritime affairs and sustainable development. The papers are written by NIMA’s regular or affiliated staff and are meant to provide clear-cut policy outlines which would promote peace, prosperity and sustainable development.

National Institute of Maritime Affairs (NIMA) is a constituent unit of Bahria University. The establishment of NIMA under the aegis of Bahria University was conceived in order to meet the objectives of National Maritime Policy. The NIMA is envisioned to serve as a focal point in Pakistan, as well as in the region for the promotion of maritime sector by defining and translating the debates of the region into peace, prosperity and sustainable development.

Contact Information: NIMA – National Institute of Maritime Affairs Bahria University, Head Office, Islamabad - Pakistan Tel: +92 51 9261968 Fax: +92 51 9261968 Email: [email protected] URL: https://www.bahria.edu.pk/nima

Contents

1. INTRODUCTION ...... 1 2. ANALYTICAL REVIEW AND DISCUSSION ...... 1 2.1 Existing Strength and Potential Market ...... 1 2.2 Enabling Role through Government Policies ...... 2 2.3 Institutional Weaknesses ...... 2 2.4 Revision in Exiting Merchant Marine Policy ...... 3 3. RECOMMENDATIONS ...... 3

i 1. INTRODUCTION

Shipping facilitates trade, countries which have large shipping sector are economically strong and developed. 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. This rule allowed carrying of 40% cargo to each trading partner and 20% to Independent shippers. Despite this rule Pakistan Shipping could not compete with countries/corporations which are firmly established as Ship Manufacturers and owners. The state of our Economy and in particular of shipping sector demands innovation and an implementable new approach. The reasons for our lack of shipping capacity are exceptionally high capital costs of new ships, archaic burdensome processes, conservative approach, corruption and lack of confidence in the Government policies. PNSC or other National flag carriers have an assured opportunity to lift 40% of the Import Export cargo and there is provision of the same in Pakistan’s Merchant Marine policy of 2001. Pakistan’s biggest issue at present is lack of Foreign Exchange (FE). In such circumstances, urgent need is to reduce the freight bill, which is estimated at about US$ 5 Billion per annum. UNCTAD 2017 report on Maritime Trade estimates that countries spend 15 to 22% of their trade value on freight and Insurance charges. If we take this estimation to be correct then Pakistan’s US$ 80 Billion Trade could have a freight component of US$ 12 Billion, National Institute of Maritime Affairs (NIMA) is in the process of researching this US$ 5 Billion freight figure accurately.

In the context above, the objective of this policy brief is to provide best possible advice to the Government of Pakistan for safeguarding the interests of national flag carrier i.e. PNSC, by reviewing and analyzing the existing practices and lessons learnt in shipping sector worldwide.

2. ANALYTICAL REVIEW AND DISCUSSION

2.1 Existing Strength and Potential Market

PNSC’s 2017 figures show its revenues are from its nine vessels, voyage charter and slot charter. Its earnings are:

a. Bulk carriers 1.15 Billion PKR b. Oil Tankers 3.95 Billion PKR c. voyage charter 3.38 Billion PKR d. Slot Charter 3.79 Billion PKR

Point to note here that PNSC Bulk Carriers are carrying International trade and these ships do not touch Pakistani Ports. The shipping cargoes are measured in two methods, either by value or tonnage. PNSC by tonnage carries around 10% of Pakistani trade and by value much less. The refined oil products are imported by PSO on CIF basis and as per the policy PNSC should lift this cargo also. It is difficult to fathom why it is not being done. This obviously will lessen our freight charges in FE to a considerable sum and add to employment

1 opportunities for our sea farers. Raising capital for new ships or bare boat charter should not be an issue with assured refined petroleum cargo destined for Pakistani Ports. PNSC is in healthy financial state with good rating and thus can get loans from local or International Banks. Similarly LNG needs are going to increase in Pakistan and with assured cargo.

2.2 Enabling Role through Government Policies

Many Governments tried to assist home shipping by requiring imports be FOB and Exports be shipped CIF. However, this is difficult to implement as too much restriction to freedom of choice of carrier is likely to discourage trade. Many governments support their shipping through affirmative action. Biggest champion of capitalism USA protects its Merchant Marine through Jones acts which mandates all Merchant ships employed in internal trade be on US flagged and built ships and with American crew. Japan has recently given tax breaks to its Shipping, Korea has provided US 5.7B, Taiwan 1.7B and China 1.3B to their respective sectors. In this backdrop, a success story is of Ethiopia which is a Land locked country and has now a bigger fleet than Pakistan. Some of the details are; a FOB directive was issued by the National Bank of Ethiopia in May 2000 that Sea Transport for every import should be done by the country’s carrier. In Ethiopia, It is the buyer that pays the freight. But the directive applies to those imports for which FE is paid. For those imports for which FE is not paid, importer is free to engage any shipping line. This FOB directive has helped save FE in Ethiopia. Though Ethiopian Shipping has 10 ships, it also has ships on time charter or on SLOT charter basis. The majority of the containers are carried by companies such as Maersk, PIL and APL but under Ethiopian Bill of Lading. Ethiopian Sea Farers have also grown manifold, Ethiopian Maritime Training Institute graduates 500 Cadets a year and plans to increase it to 1000 per year. There are many land locked countries with thriving shipping lines. Recently there are news that Afghanistan is starting its shipping registry.

2.3 Institutional Weaknesses

The Government of Pakistan announced incentives for Ship owners in the Pakistan Merchant Marine Policy in 2001 clause 4(i). In this clause a number of steps were taken which exempted ships from all kinds of import Taxes and duties until 2020. PNSC purchased and sold 19 Ships till 2013, at that point the government withdrew this exemption and imposed cumulative duties of 38%, PNSC could not buy any ship after that, this duty was again lifted in 2016. PNSC has asked for the extension in the clause till 2030, this is in favour of the Maritime sector and should be supported. However, point to ponder is that why private sector did not take benefit of this clause. NIMA researchers interviewed two of the ship owners from private sector, Both of them were complaining of the failure due to problems caused by FBR/Customs and the Government bureaucracy. NIMA also visited Mercantile Marine Department (MMD), the National register was also viewed. The department is behind times and does not have the capacity or adequate staff to handle modern demands of shipping sector like timely registration and deletion of ships. The processes are outdated

2 and the work load much beyond the capacity of the staff. The leading national and Flag of convenience registries on the other hand tout ability to register and deregister ships in 24 hours.

2.4 Revision in Exiting Merchant Marine Policy

NIMA has reviewed and analyzed the following proposed changes in the existing Pakistan’s Merchant Marine Policy 2001.

a. PNSC has recommended in Clause 4(ix) of the existing Pakistan Merchant Marine Policy 2001 that Government of Pakistan reserve for ship flying Pakistani flag, 40% share of cargo of the country. The same principle of securing foreign cargo for ships flying the Pakistani flag shall be followed when the Government concludes International Multilateral Shipping agreements. PNSC has further recommended that Organisations under the control of Government of Pakistan shall offer Pakistan Flag first right of refusal to carry such cargo failing which the said organization shall pay to PNSC an amount equal to the freight due/paid to foreign shipping line for violation of this policy. NIMA does not endorse the PNSC viewpoint and suggested alternate solution in recommendation part of this paper.

b. PNSC has recommended new insertion of clause 5(vii) that Pakistani owners of ships/floating craft operating under Pakistan Flag to be allowed to remit foreign exchange at official rate for the payments made against bunkering, ship supplies, repair maintenance and dry docking. It should be through State Bank authorized agents with a view to expedite such payments in order to obtain lowest commercial rates of the required product or service. NIMA endorses this new insertion.

c. PNSC in clause 8 (i) has also recommended Cargo preferences as under:

(1) PNSC owned vessels; (2) Pakistan Flag vessels; (3) Bareboat, Voyage and time chartered vessels of PNSC; (4) Bareboat, chartered vessels flying Pakistan Flag; (5) Foreign Flag Vessels

NIMA fully endorses this change as the previous clause led to litigation by PSO and other vested interest parties against PNSC when it tried to use Time Chartered vessel for lifting refined Cargo.

3. RECOMMENDATIONS

a. PNSC is in good position to venture into LNG carriers in future.

b. Institutional Capacity Building Measures: Capacity, training, review of processes and increase of Manpower is urgently needed at MMD, if not done urgently the shipping sector will never be able to realize its potential.

3 c. Clause 4(ix) of the existing Pakistan Merchant Marine Policy 2001: PNSC should be mandated to lift Pakistan’s Import of crude, refined petroleum and LNG Cargo. Other GOP’s entities like TCP, Defence and large Governmental Contract should have the provision in favour of PNSC. The policy should be on Governmental Imports or those where freight is to be paid in FE only. For exports if this kind of provision is put, there is danger, if not properly managed this may lead to making our Exports slow, uncompetitive and stifle the export oriented economy

NIMA - National Institute of Maritime Affairs Bahria University, Head Office, Islamabad - Pakistan Tel: +92 51 9261968 Fax: +92 51 9261968 Email: [email protected] URL: https://bahria.edu.pk/nima