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Govt considering Rs10,000 crore shipbuilding fund in budget

Livemint:  February 26, 2015

Bengaluru: Finance minister Arun Jaitley is expected to announce a shipbuilding development fund of as much as Rs.10,000 crore in Union Budget 2015, which will be used to disburse low-cost funds to shipbuilders and give a boost to the sector as part of the larger “Make in India” initiative of Prime Minister Narendra Modi.

Such a fund is under the consideration of the government, shipping secretary Rajive Kumar said on Wednesday.

Exim Bank, IDBI Bank Ltd and IFCI Ltd are expected to contribute to the dedicated fund, which is likely to be augmented by budgetary support from the government, at least two people briefed on the plan said, asking not be named.

The move will help fleet owners buy some locally built ships, one of them said.

“Getting local bank funding was a critical issue for fleet owners in the tender issued by GAIL (India) Ltd for hiring nine new LNG (liquefied natural gas) ships of which three were to be built in Indian yards,” said an Indian naval architect working with a Hong Kong-based shipyard. “The high interest cost on Indian loans would hike the ship construction costs significantly, upsetting the calculations of fleet owners,” he added.

In September, Mint reported that the shipping ministry had initiated discussions with financial institutions such as IFCI and IDBI to establish a fund to extend low-cost loans to shipbuilders, as part of a policy the ministry is drafting to promote local shipbuilding.

The price of the ship is crucial for shipowners because it is a big factor in calculating the daily hire rates, which, in turn, is one of the criteria for deciding the contract.

GAIL scrapped the tender on 17 February due to a lack of response from fleet owners.

“We are not defining the type of ships which can avail money from the planned fund. It can be used for constructing all kinds of ships including LNG carriers,” shipping secretary Kumar said.

The shipbuilding development fund will be part of a comprehensive policy drafted by the shipping ministry to promote the local shipbuilding industry as announced by finance minister Jaitley in his first budget speech on 10 July 2014.

Other features of the policy could include granting Special Economic Zone (SEZ) status to shipyards and declaring it as a strategic and infrastructure sector with attendant fiscal incentives.

“India offers immense potential for the shipbuilding industry,” Modi said at the inauguration of General Electric Co.’s multi-modal manufacturing facility at Chakan, Pune, on 14 February.

“As part of the ‘Make in India’ initiative, ship-designing capabilities, ship building and ship repair activities will be strengthened,” President Pranab Mukherjee said on Monday in his address to the joint session of both Houses of Parliament, reinforcing the view that an announcement on the fund in the 28 forthcoming budget looked imminent.

Modi has emphasized the benefits accruing from a vibrant shipbuilding industry, including its employment generation potential.

India, Modi said, has a very large army of youngsters that was as large as the country’s vast coastline.

“Shipbuilding is a very vast sector. We have young people, skilled manpower who can be easily mobilized. Shipbuilding is also not about technology. Turner, fitter, welder also are involved in shipbuilding. The poorest of the poor gets employment,” Modi said on 16 August 2014 during the foundation stone ceremony for an SEZ and road connectivity project at the Jawaharlal Nehru Port Trust near Mumbai.

“India’s contribution to global shipbuilding has been very low. South Korea, a very small country, smaller than the state of Maharshtra, today alone has a 40% share of global shipbuilding. We want to encourage shipbuilding,” Modi said.

Elaborating on his theme of ‘Come, make in India’, which he mentioned during his Independence Day address, the Prime Minister said his government will encourage foreign investment in shipbuilding.

Local shipbuilders have been struggling to get orders for constructing merchant ships after the global recession of 2008.

“Working capital to execute projects is a basic problem for all the yards,” said the chief executive officer of a private yard located on the western coast, on condition of anonymity.

In the past two years, two of India’s private yards—ABG Shipyard Ltd and Bharati Shipyard Ltd—had to opt for corporate debt restructuring with a clutch of banks as tardy cash flows and a lack of new orders strained their ability to repay loans.

Indian shipyards are outbid by Chinese and Korean shipyards due to cost differentials arising from the lack of support for the industry in India, said a spokesperson for the Shipyards Association of India, an industry lobby. “On the other hand, foreign shipyards benefit from direct fiscal and non-fiscal support from their respective governments,” he said.

Indian shipyards currently pay interest of 13-14% on capital expenditure and working capital loans for purchasing raw materials and other inputs against 4-6% in countries such as China and South Korea.

“The differential interest cost imposes a significant cost burden on Indian built ships,” the Shipyards Association spokesman added.

China’s Exim Bank gives preferential loans to its domestic shipyards at rates as low as 2.7%, which provides a huge cost advantage to Chinese shipyards, especially when a ship is financed at debt-equity ratios that are as high as 90:10 and the working capital requirements for building a ship can be as much as 35% of the cost of a ship, on an average, during its construction period, a shipping ministry spokesman said.

“Korea, China and Japan have pursued a mix of fiscal and non-fiscal incentives for encouraging growth and development of their shipbuilding industry. Shipbuilding is a capital intensive industry with a ‘sell first, build later’ model where buyers pay a small percentage of the price of the ship upfront. This requires shipbuilders to invest substantial capital in executing orders. Availability of loans at a low cost is a significant support provided by most shipbuilding countries to their yards,” the ministry spokesman added.

Indian shipyards have been lobbying for the reintroduction of a subsidy scheme that ended in August 2007 after a five-year run. The scheme offered a 30% extra amount as subsidy from the government for building ocean-going merchant vessels that are more than 80m in length, provided they are manufactured for the domestic product. Last year, transport minister Nitin Gadkari ruling out its reintroductition on grounds that government finances did not permit it.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

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