Michael Pinto: Cabotage conundrums

For reasons not easy to fathom, successive governments have found it difficult and messy to deal with the question of cabotage. Both the UPA and the NDA have approached the problem with all the embarrassed wariness of an elderly spinster asked to take a class in sex education for rowdy teenagers. The result is that both have stumbled badly in a futile effort to please both those who favour its retention and those who want it abolished.

At its simplest, cabotage simply means reserving cargo carried on the coast of a country for that country's flag vessels. Section 407 of the Merchant Shipping Act requires any foreign flag vessel to take prior permission for plying on the Indian coast and this permission is granted only if it is shown that there is no Indian flagged vessel available for the voyage. This position has prevailed since independence, but the citadel was breached some years ago when, for a period of three years, government allowed foreign flag vessels to carry containers from Vallarpadam in Cochin to other Indian ports.

A re-think on the cabotage issue became imperative because of the huge numbers of Indian containers being transshipped at ports outside India. Typically, large mother ships only call at hub ports where cargo meant for smaller ports is off-loaded and sent to its final destinations in smaller vessels and export cargo brought by these same vessels is picked for delivery at other hub ports. This hub-and-spoke operation is referred to as transshipment. When Indian exim cargo is transshipped in foreign ports the country loses both in terms of cost as well as time taken. Indian cargo is transshipped at many ports but the lion's share is taken by Colombo. Hence Vallarpadam on the west coast was earmarked as the preferred port for transshipment because of its proximity to international shipping routes and its ability to compete with neighbouring Colombo.

Unfortunately, domestic opposition to the complete abolition of cabotage forced the previous government to exempt only Vallarpadam from its operation, and for just three years at that. The problem is that cabotage is not a switch that can be turned on and off at will. If the relaxation is only for three years why would any ship-owner think of shifting from Colombo or anywhere else to Vallarpadam? Switching hub ports is a complicated business involving revised schedules, new agents and a host of other formalities. No line will do this for just three years and hence the much-vaunted relaxation has not delivered.

The new government's attempts to remedy this position, however, have actually made things much worse. The new policy mandates that to qualify as a transshipment port, a port must show that at least 50 per cent of its cargo is transshipment cargo. If the port cannot achieve this within one year it will lose its exemption from cabotage and will not be eligible for such exemption for the next three years. A new port gets a grace period of an extra year but the penalty for failure is the same. How can any port guarantee that at least 50 per cent of its cargo will be transshipment cargo? Lines have to be wooed to use Indian ports for transshipment and to presume that this can be done in a matter of one year is preposterous. Besides, what about existing ports? Can the J N Port, which currently handles nearly five million TEUs, ensure that within one year at least half of these will be transshipped?

The problem lies in our touching belief that shipping lines are queuing up to use our ports. The fact is that there are so many viable alternatives that lines are spoilt for choice. Not just Colombo but Dubai, Salalah, Singapore and other ports all handle Indian transshipment cargo. Ports compete desperately to get a share of such cargo. In a bid to woo business from Singapore, the Malaysian port of Tunjung Pelepas offered mind-boggling incentives to lines. The port now handles nine million TEUs and is ranked in the first 20 container ports in the world, but the results have not come without solid government support and huge sacrifice in terms of profits foregone. To assume that 50 per cent of an existing port's cargo can overnight become transshipment cargo is naïve. Equally naïve is the belief that a new port can achieve this in two years.

Other conditions laid down in the new policy are even more onerous. Ports covered under this new policy must ensure 100 per cent radiological scanning of all containers. If such scanning is needed, then surely it should apply to all ports, whether or not they transship cargo? This is a security requirement and is, therefore neutral to whether cargo is transshipped or not. Similarly, foreign vessels exempted from cabotage laws must get security clearance from the ministries of home and defence. By just this one clause the new policy has ensured that it will be ineffective even before it begins.

There is a case for coastal ship owners to claim a monopoly on the movement of both finished goods and raw materials along the coast. These are domestic goods for domestic consumption. But exim cargo that either originates in or is destined for an overseas location must not come within this band even if it has to move from one Indian port to another on its journey within the country. If we do not follow this principle, lines will vote with their feet for foreign ports and the bulk of our exim cargo will continue to be transshipped outside. Logistics costs will remain high but, more importantly, Indian coastal ship owners will not benefit because there will be no preference for them in foreign ports.

The bottom line is that government doesn't really need to issue a complicated order detailing terms and conditions that cannot possibly be met. It's enough to say that Section 407 of the Merchant Shipping Act will not apply to containerised exim cargo.

The writer is a former Secretary for Shipping

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