The Shipping Ministry’s plan to drive demand for ships built in India by linking a government-mandated cargo support policy for domestic fleet owners to India-built vessels, may yet not work out.
Indian-built, Indian-flagged and Indian-owned ships will get top priority when state-owned firms and government departments float tenders to hire ships for hauling cargo or for dredging and offshore oil exploration support services, according to the new rules on the so-called right of first refusal (RoFR) announced on Thursday.
Foreign-built, Indian-flagged and Indian-owned ships will get second preference while Indian-built, foreign-flagged and foreign-owned vessels will be third in the order of priority.
All existing Indian flag vessels (regardless of whether these are built overseas) up to the date of issue of the new circular on RoFR by the Director General of Shipping will be treated as Indian-built, Indian-flagged and Indian-owned vessels and accorded first priority under the new RoFR norms. This is the key part of the new rules.
Local fleet owners such as Shipping Corporation of India Ltd and Great Eastern Shipping Co Ltd, among others, will benefit from this “grandfathering” clause in the new RoFR rules.
Till now, local fleet owners got a right to match the lowest rate offered by a foreign flag ship in tenders issued by state-run firms for hiring ships under the chartering guidelines framed by the DG Shipping. If Indian shipping companies declined, only then would the foreign flag ship that had quoted the lowest rate, be allowed to carry the cargo or provide services.
“The re-designed RoFR is good for us,” said an executive with a Mumbai-based shipping company. “Otherwise, all the ships (foreign-built) we own today will not qualify; these we have bought investing hundreds of millions of dollars over the past few years,” he added.
Foreign-built ships purchased by local fleet owners after the new RoFR rules are notified by the DG Shipping will get preference under the second category (foreign-built, Indian-flagged and Indian-owned).
Will this spur local competition?
Will that compel local fleet owners to start building ships in India to get first priority and avail the benefit of the cargo support policy?
This will purely be a commercial call of the ship-owners, depending on their penchant for ordering brand new ships or buying used ships from the second-hand market.
Most Indian ship-owners, with the exception of Shipping Corporation, buy second-hand ships to suit market needs. Given that Indian shipyards have not built crude oil, product, gas carriers and bulk carriers in the recent past, the second-hand ships available in the market would invariably be foreign-built and, hence, categorised under the second priority group (foreign-built, India- flagged, Indian-owned).
However, in the absence of Indian-built ships applying on the tender for the same reason, the foreign-built, Indian-flagged and Indian-owned ships will, by default, be preferred for the contract, making it an attractive option for Indian ship-owners to pursue.
The new RoFR norms will probably start yielding results in the longer term when the existing foreign-built, Indian-flagged and Indian-owned ships that are protected by the “grandfathering” provisions are sold or scrapped at the end of their economic life and replaced with Indian-built ships.
This possibility will again depend on the continuation of the government policy not only on RoFR but also on the shipbuilding financial assistance scheme that will end in 2026. What if a new government at the Centre decides to reverse the RoFR rules and discontinue the shipbuilding subsidy scheme after the 10-year run, taking away whatever little price advantage it gave to an industry saddled with over-capacity globally?