With the shipping ministry's new policy allowing Indian firms in the port sector to match the lowest offer received from foreign bidders provided their bids are within 5 per cent of that offer, a new era has dawned.
The policy represents a shift from the earlier stand that any attempt to interfere with the rates thrown up by the tender process would not only offend against transparency but also give Indian port developers an advantage that would ultimately have to be paid for by the port user, who, in effect, is forced to subsidise a less competitive bid.
It is true that official policy mandates preference to state-owned units in government purchases. In the shipping sector too, Transchart permits Indian shipping companies to match the rates offered by foreign companies.
Similarly, before allowing any shipper to charter a foreign vessel for use on the coast, the maritime administration ensures that no Indian ship-owner can offer comparable services at the same price. It will be for the first time, however, that Indian entrepreneurs entering the port sector will get this benefit. What has led to the change of heart?
The obvious answer lies in the fact that almost the entire private investment in container terminals in both major and non-major ports has been by foreigners. Except for an Indian presence in the private container terminal in Vishakapatnam, private investment in container terminals continues to be dominated by foreign capital.
The first important private investment in the port sector took place in 1997 and was made by a foreign firm. In the eight years that followed, the government has shown little inclination to give special treatment to Indian capital. The shift in policy, therefore, should really be viewed in the context of the new developments worldwide.
A recent, much-publicised exercise by which AP Moller-Maersk entered into an agreement to purchase P&O Nedlloyd has held the shipping world in thrall. When the deal goes through, Maersk, which now has about 400 ships and roughly 12 per cent of the world container traffic, will add P&O's 156 vessels to its fleet.
This is expected to give them a market share of about 17 per cent. When it is remembered that the next largest container company has a market share of less than 5 per cent, the enormity of this acquisition can be appreciated. There is no other way by which Maersk could have added so substantially to its fleet in such a short time. New acquisitions through the building route would necessarily entail a much longer period.
While the deal puts Maersk far ahead of any other player in the world container market, it effectively takes P&O out of the shipping business. For a firm that was once a diverse shipping empire with interests in passenger and liner shipping as well as bulkers and tankers, this will be a major change.
It has been a long time since P&O liners transported passengers from England to India and to other parts of the far-flung British Empire but even P&O's cruise business ended when it was taken over by the American cruise firm Carnival. Over a period of time it withdrew from other ocean-shipping areas and today, aside from a slew of ferry services around the UK, P&O is now effectively in only one sector of the maritime industry: ports.
All this did not happen by accident. Exit from passenger shipping was the natural corollary to the advent of air travel and the takeover of the firm's cruising business by an American rival. But the decision to distance the firm from other areas of ocean shipping was clearly part of a long-term strategy. Shipping is essentially a cyclical industry.
Currently it is going through a boom phase that has lasted far longer than most had predicted. This is due both to the explosion of world trade and to the insatiable appetite shown by China for import of raw materials and its massive export of finished goods.
But sooner or later the trend will be reversed. New tonnage on order will catch up with demand for the transportation by sea of raw materials and finished products and shipping will once more experience the slump that usually follows periods of high growth. When that happens, returns to shipping companies will plunge.
It is important to evaluate shipping strategies in this context. Family-held firms like Maersk are aware that bad times will follow the good and that belts which were let out to accommodate the expansion of the bottom line in good times will have to be tightened when things change.
But when impatient shareholders of widely-held firms are faced with the realities of a cyclical industry, they tend to complain. They cannot understand why returns that were invariably in double figures now slump to single figures or even less.
Widely-held shipping companies are always at a disadvantage in explaining these facts to shareholders. But companies in the business of port development do not have this problem. For them the party is likely to continue even when there is a downturn in the shipping industry.
Just look at the immense growth rates posted by Indian ports in the recent past. Major ports recorded growth in excess of 11 per cent last year on the back of nearly 10 per cent in the previous year.
Non-major ports, which a few years ago accounted for no more than 5-6 per cent of the traffic handled in the country, now handle more than 25 per cent. Add to this the fact that no new major ports are planned for the next ten years at least and non-major ports are being revived rather than constructed from scratch and it will be clear that the existing ports are likely to see an exponential increase in traffic over the next few years.
This is especially true of container traffic, where growth is inhibited by lack of capacity. Thus, while investment in ports is likely to pay rich dividends over time, investment in shipping will be subject to the vagaries of a cyclical market. There should be no prizes for guessing which is more attractive.
The new initiative of the shipping ministry should be seen in this light. Indian investment has so far flowed mostly into shipping, where returns are at best uneven. Investment in ports, however, which is far more profitable, has been the almost exclusive preserve of foreign capital. Domestic investment is now being nudged in the right direction.
