Pakistan's Seaborne Trade

NIMA POLICY PAPER Series # 005 June 2019

PAKISTAN’S SEABORNE TRADE: ESTIMATION OF FREIGHT BILL 2018

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

First Edition

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

Category: Policy Paper

Title: Pakistan’s Seaborne Trade: Estimation of Freight Bill 2018

Authors: Syed Khawar Ali Shah* Kanwar Muhammad Javed Iqbal** Ali Abbas***

Reviewed by: Khurram Mirza, Executive Director Special Projects, PNSC, Karachi Asaf Humayun, Vice Admiral (Retd) and Former DG NCMPR, Karachi Ubaid Ullah, Commodore (Retd) and Former Executive Director, PNSC, Karachi

First Edition: June 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] *** Commodore (R) and Director at NCMPR Karachi reachable at [email protected]

All rights reserved. No part of this Policy Paper 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

ACRONYMS ...... ii 1. INTRODUCTION ...... 1 2. METHODOLOGY ...... 1 3. FREIGHT ESTIMTATION ...... 2 3.1 Freight from PNSC’s Import Data Source ...... 2 3.2 Freight from Other Import Data except PNSC Source ...... 3 3.3 Freight from Non-containerized Bulk and General Export Data ...... 3 3.4 Freight from Containers’ Data ...... 4 3.4.1 Freight from Containers’ Import Data ...... 4 3.4.2 Freight from Container’s Export Data ...... 5 3.5 Consolidated Seaborne Freight Bill ...... 6 4. FINDING AND CONCLUSION ...... 7 5. RECOMMENDATIONS ...... 7 BIBLIOGRAPHY ...... 8

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ACRONYMS

C&F Cost and Freight CIF Cost, Insurance and Freight FE Foreign Exchange FOB Free On Board FY Fiscal Year GoE Government of Ethiopia HSD High Speed Diesel KICT Karachi International Container Terminal KPT Karachi Port Trust LNG Liquefied Natural Gas LPG Liquefied Petroleum Gas MOGAS Motor Vehicle Gasoline NRL National Refinery Limited OMC Oil Marketing Company PARCO Pak Arab Refinery Ltd PNSC Pakistan National Shipping Corporation PQA Port Qasim Authority PRL Pakistan Refinery Limited PSAA Pakistan Shipping Agents Association PSO Pakistan State Oil UNCTAD The United Nations Conference on Trade and Development US$ United States of America Dollars WeBOC Web Based One Customs (WeBOC) Pakistan

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1. INTRODUCTION Pakistan’s trade during the period under review i.e. 2018 was approximately 84 Billion US Dollars. Pakistan’s over 90% trade by volume is through Sea. Trade also occurred through land borders with China, Afghanistan, India and Iran by Trucking and Rail. Trade which is of small volume but of high value products and some perishable items like fruits is mostly through Air. The trade can be measured in volume (i.e. tonnage) or by value. Under the provision of United Nations Liner Code 1974, Pakistani Ships can lift at least 40% of import/export of Pakistan by volume, this allowable percentage can go up to 60%. Trade and shipping go hand in hand, this rule was introduced by the United Nations to improve trade of the developing countries as at that time most of the shipping lines were owned by rich countries and they could manipulate trade accordingly.

Pakistan has major balance of payment problem, the country is short of dollars with outflows of Dollars for imports, debt servicing and import of services being much more than the country’s earning ability of dollars. Therefore, there is a need to save on dollars and one of the major import service is freight paid to foreign shipping, hence need to calculate freight on annual basis. This visibility will help the decision makers to plan better for accruing advantage to Pakistan and leading to increase in our National fleet size. With an assured long term import cargo of Crude oil, refined petroleum, LNG, LPG, Coal and Edible oil worth over 18 Billion dollars; the government has leverage to mandate the cargoes to be on Free On Board (FOB) basis, this entails that buyer i.e., Government of Pakistan will have the responsibility to pick cargo from designated port, thus Cargo can be lifted on Pakistani flag vessels. Pakistan National Shipping Corporation (PNSC) is transporting total crude imports of Pakistan. However, with PSO buying refined products and LNG at Cost and Freight (CF) basis, the seller arranges for shipping to Karachi and therefore the advantage goes to Foreign Shipping. Many developing governments’ world over, such as Ethiopia (FOB Directive, 2000), have tried to assist growth of National Shipping by requiring all imports to be on own Flagged vessels.

The annual statistics issued by the Government of Pakistan or any other National agency does not depict the Foreign Exchange (FE) spent on Freight in a whole- some manner. The trade figures are issued on value basis of the imports and exports, therefore there was a requirement to look at the data in tonnages and to verify more precisely the money spent on freight charges.

2. METHODOLOGY This research study has examined in depth the topic of importance and estimated the seaborne freight by scrutinizing the primary and secondary sources of data / information / available freight estimation methods, and taking into account all relevant variables of import and export data for seaborne trade during the calendar year 2018. The primary sources include Semi-structured Key Informant Interviews of responsible position holders of State Bank, Pakistan Statistical Bureau, PNSC, Foreign shipping companies, Pakistan International Freight

1 Forwarders Association (PIFFA), PSO, KPT, PQA, Pakistan Shipping Agents Association (PSAA) and Subject Matter Experts.

State Bank has a requirement that all shipping companies submit the amount spent on freight to State Bank, prior approval is accorded to remit Foreign Exchange. However, instead of tabulating the actual remitted amounts, State Bank of Pakistan’s Statistical Branch has arrived at a Statistical formula by sampling freight expenses of around 1000 importers and their method of calculation of freight is a fixed 2.7% of the value of the total import and export trade of the country. They issue this for a period of 3 years. According to State Bank of Pakistan’s statistical formula, total freight bill was 2.7% of total US$ 84 Billions trade i.e.; US$ 2.26 Billion that includes Afghan Land Trade and Air import/export. The air based trade has an approximate figure of 350,000 tons for which air freight is about US$ 1 billion that further limits the State Bank’s estimated Sea freight component to US$ 1.26 Billion.

Pakistan’s Trade Data from websites of Web Based One Customs (WeBOC) Pakistan and Pakistan Statistical Bureau was also scrutinized in detail to assess the trade patterns. It was difficult to gather freight data specially related to imports on Cost and freight basis as PSO and private importers were reluctant to share the exact figures for freight.

Worldwide freight rates were taken from three different private companies. Major problem came up with container based trade as there was variation in rates for the same destination, Export container charges to the same destination were much lesser as compared to the imports. The Coal and edible oil is imported by the private sector again on CIF basis, for which PNSC shared very useful data to estimate the freight. Coupled with this, there is some over and under invoicing which distorts trade figures and this was shared by some shipping agents on condition of anonymity.

3. FREIGHT ESTIMTATION The total seaborne freight estimation was done by classifying the data into following 5 different categories i.e. (i) Import data and estimated freight from PNSC’s source, (ii) Import data from Ports’ sources, (iii) Non-containerized Export Data of Bulk and General Items, (iv) Import Data of Containerized Shipping and (v) Export Data of Containerized Shipping. Following sub-sections provides basic freight estimations for five different categories, Table 6 shows consolidated Seaborne Freight Bill of Pakistan (Calendar year 2018) and Figure 1 shows percentage share of different categories.

3.1 Freight from PNSC’s Import Data Source

Table 1 provides freight estimates for segregated import data collected from PNSC sources.

2 Table 1: Freight Estimation from PNSC’s Import 2018 Shipments / Numbers / Freight Amount S.No. Freight Head Quantity US$ Crude Oil for refineries lifted by PNSC ( PRL, 1 PARCO, NRL) - 110 Shipments 110 38,500,000 Crude Oil for BYCO 50 Shipments (5 2 Shipments by PNSC) 50 20,000,000 3 MOGAS-PSO 48 Shipments 48 21,600,000 4 MOGAS-Other OMCs 83 Shipments 83 24,900,000 5 HSD-PSO 50 Shipments 50 20,000,000 6 LNG 110 Shipments 110 165,000,000 7 Coal 220 Shipments 220 65,000,000 8 Edible oil 245 shipments (some partials) 245 25,000,000 Sub-total A 916 380,000,000 Note: PNSC Estimated cost of Freight is based on calculation for Time chartering of ships, Cargo carried and number of days needed for a voyage.

3.2 Freight from Other Import Data except PNSC Source

Table 2 provides freight estimates for segregated import data collected from KPT and PQA sources. This data excludes PNSC sources for which all duplications have been avoided.

Table 2: Freight Estimation from Ports’ Import Data Sources Shipments / Numbers / Freight Amount S.No. Freight Head Quantity US$

1 Jet Fuel JP-1 247,027 tons 13 Shipments 13 1,800,000 Organic/Inorganic Chemicals 1,230,000 tons 2 Shipments 126 126 18,900,000 3 Iron and Steel Articles 16,822,446 tons 374 112,200,000

4 Fertilizer and seeds 2,231,000 tons 50 15,000,000 5 LPG 85 Shipments 85 24,600,000 6 Misc Dry and General Cargo 8,646,000 tons 192 57,600,000 Sub-total B 840 230,100,000 Note: Estimated freight amount is based on Time Charter costs.

3.3 Freight from Non-containerized Bulk and General Export Data

The non-containerized export of cargo includes Cement, Rice and miscellaneous dry and general cargo along-with liquids such as Molasses, Crude and other bulk items etc. Table 3 provides estimated freight against the quantity of these items viz-a-viz calculated shipment costs for 2018.

3 Table 3: Freight Estimation from Non-containerized Export 2018 Shipments / Numbers / Freight Amount S.No. Freight Head Quantity US$ 1 Cement (includes Clinker) 5.8 Million tons 81,200,000 2 Rice Mostly Irri 6 2.179 Million tons 23,969,000 3 Liquid Exports Molasses, Crude etc. 1.5 Million tons 15,000,000

4 Misc. Dry and General Cargo 3.6 Million tons 43,200,000 Sub-total C 163,369,000

Note: The Bulk freight varies for cement export to US$ 11 per ton to South Africa to US$ 18 per ton to Philippines. Clinker to Bangladesh is transported at 14 US$ per ton.

3.4 Freight from Containers’ Data

Trade Statistics Import and Exports based on Container Traffic. Pakistan’s total container throughput in the period under review was 3,478,441 TEUs. Out of which half was 48% (1,653,121) Import laden, 3% (103,320) Import Empty, 27% (929,880) Export Laden and 23% (792,120) Export Empty. The average container freight rates applied for various destinations are as under:

i. North America = US$ 2000 (Import/Export) ii. China Imports = US$700 - Exports = US$ 200 iii. EU = US$ 1200 (Import/Export) iv. Japan = US$ 1800 (Import/Export) v. Korea = US$ 1200 (Import/Export) vi. Malaysia/Indonesia/Singapore = US$ 600 (Import/Export) vii. UAE Exports = US$ 900 - Imports = US$ 100 viii. Sri Lanka = US$ 250 (Import/Export) ix. Bangladesh = US$ 700 (Import/Export) x. East Africa = US$ 700 (Import/Export) xi. Others = US$ 700 (Import/Export) xii. Empty Export = 10 US$ - Import no charges

3.4.1 Freight from Containers’ Import Data

Table 4 provides cumulative freight estimation from the import of 1,653,121 total laden containers with country / region / or item wise breakdown for 2018 and applicable average freight rates. Freight for the empty containers are not taken into account as these are mostly hauled with different arrangements by shipping companies without levying charges.

4 Table 4: Freight Estimation from Import of Laden Containers for 2018 %age Share Average (out of Country / Freight rate 1653121 Regional per Total Freight Country / Region / laden Import Share container Estimate S.No. Item containers) (Containers) (US$) (US$) 1 China 28.69 474,280 700 331,996,290 2 Middle East 13.98 231,106 100 23,110,632 3 North America 6.29 103,981 2000 207,962,622 Malaysia/ Indonesia/ 4 Singapore/ Thailand 9.66 159,691 600 95,814,893 5 Japan 3.98 65,794 1800 118,429,588 6 EU 5.95 98,361 1200 118,032,839 7 Korea 1.42 23,474 1200 28,169,182 8 Other countries 30.03 496,432 700 347,502,565 Sub-total D 100.00 1,653,121 - 1,271,018,612 Note: Container Import/Export rates are highly competitive and can vary considerably.

3.4.2 Freight from Container’s Export Data

Table 5 provides cumulative freight estimation from the export of 929,880 total laden containers with country / region /or item wise breakdown as well as 792,120 total empty containers for 2018 and applicable average freight rates. Freight for the empty containers are not taken into account as these are mostly hauled with different arrangements by shipping companies without levying charges.

Table 5: Freight Estimation from Export of Containers for 2018

Average Country / Freight %age Share Regional rate per Country / Region / (out of Import Share container Total Freight S.No. Item 929,880) (Containers) (US$) Estimate (US$)

A. Cumulative Export of Laden Containers (Total containers 929,880) 1 USA 16.69 155,197 2000 310,393,944 2 EU 28.74 267,248 1200 320,697,014 3 China 7.34 68,253 200 13,650,638 4 UAE 3.77 35,056 900 31,550,828 5 Bangladesh 3.14 29,198 700 20,438,762 6 Saudi Arabia 1.70 15,808 700 11,065,572 7 Korea 1.57 14,599 1200 17,518,939 8 Other countries 37.05 344,521 700 241,164,378 B. Cumulative Export of Empty Containers (Total containers 792,120) 1 Empty Containers - 792,120 10 7,921,200

Sub-total E 100.00 929,880 - 974,401,277

5 3.5 Consolidated Seaborne Freight Bill

Table 6: Consolidated Seaborne Freight Bill of Pakistan 2018

Consolidated Seaborne Freight Bill of Pakistan (2017-18) Estimated %age S.No. Freight Head Freight (US$) Share Import Data from PNSC Sources 1 (Sub-total A) 380,000,000 12.6% Import Data - Ports Sources except PNSC 2 (Sub-total B) 230,100,000 7.6% Exports - Bulk and General 3 (Sub-total C) 163,369,000 5.4% Containers – Import 4 (Sub-total D) 1,271,018,612 42.1% Containers – Export 5 (Sub-total E) 974,401,277 32.3%

Grand Total (A+B+C+D+E) 3,018,888,889

Import Bill (A+B+D) 1,881,118,612 62.3%

Export Bill (C+E) 1,137,770,277 37.7%

Figure 1: Percentage share of different import / export categories

6 4. FINDING AND CONCLUSION The outcome of this study has provided an authentic baseline estimation of Pakistan’s Seaborne Freight by analysing the calendar year 2018. Estimation of freight for 2018 was a difficult exercise because of many variables, not sharing of actual freight, different rates for same port, types of containers from ordinary to Reefer to high Cube etc., non-availability of consolidated Freight Passage amount at State Bank and majority of imports being on C&F and Exports on FOB basis. Some estimation, therefore, had to be made by using approximate method in absence of accurate information. It is hoped that level of required data will improve with next such exercise. Some weaknesses were observed during the study for example Statistics department at State Bank compiles data on FOB basis since they are not measuring actuals they use statistical model for Freight calculations by sampling about 1000 Importers and through a survey they determine the freight cost. Once they have calculated a figure then across the board they use that figure for 3 years. The current constant factor is 2.7% of Import and Export payments. This seems to have a major discrepancy. Federal Board of Revenue has a WeBOC system which does not depict freight values of the cargo while the same can be measured once entries are being made. Since it was a first exercise of this nature, it is considered that the value of total freight lies within a margin of error of 10%. It is hoped that the decision makers use this to provide assured national cargo to PNSC so that consequently they can increase their fleet.

5. RECOMMENDATIONS Based on overall study, followings are recommendations:

a. State Bank may consider changing its freight estimation parameters for improvement and better accuracy. b. FBR may consider adding freight value along-with commodity, quantity and value in WeBOC system. c. This exercise needs to be undertaken annually by a committee of NIMA, State Bank and FBR. The current outcome will serve as baseline for future comparison. d. Buying of more ships is strongly recommended for PNSC. e. Revision of Merchant Marine Policy 2001 by MoMA to include more incentives for Private ship owning in Pakistan.

7 BIBLIOGRAPHY GoE (2000). FOB Directive 2000 Issued by the National Bank of Ethiopia, Government of Ethiopia

Import and Export of Pakistan 2017-18. Web Based One Customs by GoP. Available at: https://www.weboc.gov.pk. Last accessed on 10.06.2019.

Khan, M.N. (2018). Role of Logistics in Trade Promotion with reference to Pakistan. Article published by PIFFA available at https://www.piffapk.com/downloads/reports/Article- byMuhammadNadeemKhan.pdf Last accessed on 10.06.2019.

KPT Port Operations Data. Available at http://kpt.gov.pk/. Last accessed on 10.06.2019.

Malik, M. (2012). Country Report Presentation. Published by PIFAA. Available at: https://www.piffapk.com/.Last accessed on 10.06.2019.

Mustafa, G. (2018). Pakistan – An Important Logistics Hub for Transit Trade. Article published by PIFFA available at https://www.piffapk.com/downloads/reports/Article- CaptGhulamMustafa-Waterlink.pdf Last accessed on 10.06.2019.

Pakistan Shipping Agents Association. https://www.psaa.org.pk/. Last accessed on 10.06.2019.

PNSC (2018). Annual Report, 2017-18.Available at: https://www.pnsc.com.pk/.Last accessed on 28.05.2019.

Port Performance Data (2014-2019). Port Qasim Authority. Available at: http://pqa.gov.pk/.Last accessed on 10.06.2019.

PSO (2017). Annual Report 2017. Available at: https://psopk.com/. Last accessed on 26.05.2019.

PSO (2018). Annual Report 2018. Available at: https://psopk.com/. Last accessed on 26.05.2019.

Review of Foreign Trade. 8 Digit data of Import and Export 2017-18 by Pakistan Bureau of Statistics, GoP. Available at: http://www.pbs.gov.pk/.Last accessed on 27.05.2019.

State Bank of Pakistan (2018). CIF Margin for Import Payments 2018 by Statistics & DWH Department of State Bank of Pakistan (SBP)

United Nations (1975). UNCTAD Liner Code 1974, Final Act Volume II. United Nations Conference of Plenipotentiaries on a Code of Conduct for Liner 1974 Conferences. UN, New York. Available at https://unctad.org/en/PublicationsLibrary/tdcode13add.1_en.pdf

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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

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