Emerging Challenges of Commercial Management of Shipping Industry

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Emerging Challenges of Commercial Management of Shipping IndustryPrepared By:Ravindra Gharat MFM-III

CONTENTS1. Introduction 3-3

2. Objective And Methodology 4-53. Ship Management 6-144. Seaports 15-245. Economics of Ship Operation 25-346. Economics of Ship Manning 35-447. Economics of Chartering 45-49

8. Finance and Economic Appraisal 50-679. Personal and Administration 68-7210. Maritime Education 73-7711. Liner Services 78-8512. Tanker Carrier 86-8713. LNG Carrier 88-88

14. Maritime Safety 89-9715. Fleet Management 98-11316. Shipping Industry in The Internet Era 113-12117. Conclusion 123-127

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ACKNOWLEDGEMENTS

It is always satisfied to meet someone who is good at a job.

It is equally refreshing to deal with people who are well informed,exhibit sound knowledge of their profession and are at the wittingedge of new developments in fields to find someone who

possesses both these qualities in abundance is something specialindeed, particularly when that persons is able to communicateverbally and literally in manner that is convincing yet not

patronising comprehensive but not boring and can delivermaterial in an enthusiastic, motivating style.

The preparation of the project would not have been possiblewithout the support and valuable contribution of number ofKnowledge Oriented professionals.

The preparation of the project would not have been possiblewithout the support and valuable contribution of number ofKnowledge Oriented professionals.

The project benefited greatly from the support and guidanceprovided by the Shri. R. Rajendran, AGM, SCI Ltd,. The expertise

and critical intellectual advice provided by them helps toconsolidate the contents. For Conception to Completion of the

project Prof. N. S. Shetty, NMIMS, Mumbai for his continuingsupport and guidance is giving the project a definite shape. Hisextremely helpful suggestions and deep knowledge of theindustry gave me the necessary insight of the complex subject.

The project is never the product of a single individual. Thoughtmy name appears on the cover, I owe a number of people a great

debt for helping me along the rocky & wonderous path of writinga report.

I have also had some wonderful reviews along the way,individuals who helped me to clarify and refine my thought, whomade the text more useful and more engaging. I am especiallyindebted to Ms. Jyoti Talekar and Mrs. Pretha Nair who were

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extremely helpful with their insights. They provided me with acritical perspective of processes & functionality. They took thetime and energy to delve into early versions of this report and

provide detailed comments on hot to enhance my ideas.

Date 15/12/2001NMIMS, Mumbai RavindraP. Gharat

Introduction

For delivery of goods, the four basic modes of transport are ocean, air, rail and road. Globally, the railwayand road networks are largely used for domestic movement of goods while shipping is primarily used fortransporting goods in large quantities between nations.

The world sea-borne trade, at around 5.5 billion tonnes in 1999, represents nearly 95% of totalmerchandise trade and has been growing at more than 3% over the past two decades. In terms of value,the global shipping industry is estimated to be more than USD$ 225 billion and constitutes a significantpart of the world GDP.

As India makes a transition from an "import-substitution" closed economy model to an outward-orientedtrade regime, the importance of shipping, as an enabler of trade and economic growth cannot be over

emphasized. The country's transport infrastructure is still underdeveloped.

Freight costs, measured as percentage of total value of imports (CIF) is around 10.3%, one of the highestin the world. Against this, the global average is around 5.24% and the average for all developingeconomies is around 8.04%. Massive improvement in transport infrastructure is necessary to enable futuretrade and economic growth.

While, around Rs. 100 billion (USD$ 2.5 billions) of investments have been made in the last 5 years toaugment port facilities in the country, and equally massive investments in road and rail networks, theshipping sector has received least attention from both investors and government bodies.

This has led to the following scenarios:

Sub optimal realization of benefits from investments in ports as domestic shipping infrastructure is unableto keep pace with demand. Sidelining of the domestic industry by foreign players as the governmentgradually reduces fiscal, regulatory and other support. This would be a natural outcome of demand fromshippers for lower costs and greater efficiency as they also face greater competition in both local andinternational markets.

On the brighter side, new opportunities are opening up for the sector. Trade volumes-both overseas andcoastal- are rising very fast. Opportunities in specialized sectors like LNG and containers are also rising.

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Integrated logistics and multimodal transportation are opening up the new business areas for shippingcompanies.

Against this background, Indian shipping industry report gives an overview of the industry and thechanging business environment in which it operates. The study is an outcome of efforts to fulfil the

information and research needs of the participants of maritime industry- both global and Indian. Webelieve that the report would be useful to players in shipping and logistics industry, policy makers,investors and academicians.

Objective And Methodology

Objective of study is, we are all familiar with the term Information Management. This term came aboutwhen people realized that information is a resource that can and needs to be managed to be useful in anevery organization. From this, the ideas of Information Analysis and Information Planning came about.Organizations are now starting to look at "knowledge" as a resource as well. This means that we needways for managing the knowledge in an organization. We can use techniques and methods that weredeveloped as part of Knowledge Technology to analyze the knowledge sources in a shippingorganization. Using these techniques we can perform Knowledge Analysis and Knowledge Planning.

In these model a knowledge source in such a way that we can analyze its usefulness, its weaknesses andits appropriateness within the organization. It is a necessary step for the ability to manage information.Within we can use modeling and acquisition techniques.

When knowledge planning an organization has a grip on its knowledge (i.e. has performed Knowledge

Analysis), it will be able to plan for the future. An organization will now be able to develop a multi-yearknowledge plan that defines how the organization will develop its knowledge resources, either by trainingits human agents, or by developing knowledge-based systems to support the human agents, or by othermeans that allow the organization to stay competitive.

In Knowledge Technology (KT) this is, as the word already implies, the (application of) techniques andmethods from the field of AI, or to be more specific, the field of knowledge-based systems. KT has beenaround for quite some time, and most people know about the application of KT in the form of expertsystems, and decision support systems. Techniques and methods to design these kinds of systems are wellknown.

Computer Supported Work Systems (CSWS): This is a formal and informal (human) activity system,within an organization where the (human) agents are supported by computer systems. The application ofKnowledge Technology is very helpful in such work systems, although definitely *not* the onlyimportant factor in the analysis and design, nor in the effectiveness of the activity system.

Knowledge management is an audit of "intellectual assets" that highlights unique sources, criticalfunctions and potential bottlenecks which hinder knowledge flows to the point of use. It protectsintellectual assets from decay, seeks opportunities to enhance decisions, services and products throughadding intelligence, increasing value and providing flexibility.

To serve customers well and remain in business companies must: reduce their cycle times, operate withminimum fixed assets and overhead (people, inventory and facilities), shorten product development time,

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improve customer service, empower employees, innovate and deliver high quality products, enhanceflexibility and adaptation, capture information, create knowledge, share and learn.

None of this is possible without a continual focus on the creation, updating, availability, quality and useof knowledge by all employees and teams, at work and in the marketplace.

Meeting the challenges

Being a successful ship management company in the future means meeting two key challenges that areinextricably linked. In doing so we must also deal with the constant changes that occur in the shippingindustry, such as market fluctuations changes often produce conflicts that have to be managed. Morechanges will affect clients in the next few years than they have seen before. Referring to fundamentalchanges in the commercial position of ship owners that will have a profound impact on their approach toship management. One such change is a clear trend towards consolidation among charterers, giving themmore marketing power in relation to owners.

Role is to enable clients to be as close as possible to the cutting edge of technology, withoutincurring large development costs.

Charterers will become much more powerful than the owners may need to look at pooling arrangementsthat work for the benefit of their members. There is a need for some consolidation of owners to match thatof charters. His shift in the balance of power in favour of charterers may be reinforced by the trendtowards e-business, which could reduce the role of brokers as a moderating force in the market.

A key influence on the attitude of owners is the increasing body of legislation affecting ship operations,the growing cost of compliance with all these rules and the more intrusive ship. Inspections that go withthem. The ISM Code is just one example. Shipping industry takes ISM Code very seriously and seeks toembrace the spirit of the regulations and not just the letter. There will be greater focus on how the ISMcode is complied with. It is becoming increasingly difficult for owners doing the jobs of managing shipsproperty. The real problem of multiple inspections is a practical one, that inspections take place in portwhen they can interfere with operations. Ship managers can help to meet these requirements. It is difficultto see how small owners can manage these demands effectively. Using a ship manager can help them dothis by sharing the burden of the necessary support services.

Investment in IT System and e-business across its managed fleet gives the manager further advantages indelivering benefits to client owners. Ship management is now a mature and competitive market. The sizeof a managed fleet is becoming more critical in order to meet certain requirements and reduce costs.Technology, and e-technology in particular, is providing the tools to do this, but shipping remainsessentially a people business. It is inevitable that there will be problems from time to time and theowner/manager relationship.

Looking to future, believes that the importance of good client relationship will increase. Ship

management will evolve as a service industry. We must look at way of serving industry. We must look atway of serving our clients better and becoming closer to them. The days of a purely technical approach toship management terms while gaining a fair remain recompense in a competitive market. Shipmanagement will remain a competitive sector with no manager likely to become large enough to exertany control over the market as a whole.

Methodology

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While preparing this project much concentration is given on changes appearing in global shippingindustry. Shipping industry changes very drastically comparatively olden age. Today global market openfor all the sectors, large produced goods import and export from various country. To cope up with thissystem concentration is required to given on international standards.

To gather the valuable information of shipping management numbers of professional in shipping sectorwere discussed, also to get broad view of subject several shipping related books and magazines referred.Also the websites surfed to get technically and mechanism used by various shipping industry all over theworld. To get the information of shipping management is difficult task because very few industriesinvolved in India. Related to this sector limited books and magazines are available.

The study concentrates the information useful to Indian shipping industries to run the ship ininternationally. It is to understand the major aspect of shipping sector and to sustain in Internationalmarket. Also the main aspect of shipping management is required to understand the function of shippingto ship manager and owners point of view

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Ship Management

Ship Management is a service industry where good client relationships are essential to provide the bestservice.

Development in the ship management business and its success owes a good deal to being aware of trendsin the industry and the evolving needs of shipowners using the services of third-party managers.

Owners and managers now have to deal with a large number of other agencies. The traditional role ofclass societies has increased and they are now much more commercial organisations. They have to dealwith these and other industry agencies, such as charterers inspectors, as well as government agencies,such as port state control. This manifests itself in multiple inspections. Role is to operate ships whilepushing ahead and implementing new standards, but they must not forgot that the main focus foreverything do is for clients and their ships.

The days of a purely technical approach to ship management are over. Wemust aim to get closer to our clients in management terms while gaining a

fair recompense in a competitive market.

It was widely predicted that the introduction of the ISM code in 1998 would lead to a significant increasein business for larger ship managers, as smaller owners and managers would be unable to meet the codesonerous requirements for safety management system. In fact, this did not happen and there remains awide range of large, medium and small ship managers. In practice, the ISM code has tended to beregarded as another quality standard instead of, as was intended, a new safety culture. They must be getback to that approach if the ISM code is to be properly effective and those managers operating a highsafety culture will benefit. It should also roll in new environment standards.

Ship management is probably the most maligned service industry in the world. Ship managers perform apivotal role in the middle of the shipping business. Managers must help owners earn a profit while

satisfying the needs of others interest, such as characters, simultaneously operating ships safely andefficiently. Individual ships all have different requirements, with varying combination of flags, class, andcrew nationalities, and theses all have to be managed by the ship managers.

In general, owners now required a more professional service from managers than in the past and take acloser in the way their ships are managed, as well as the closer interest in the way their ships aremanaged, as well as the financial aspects.

Historical Growth of Indian Fleet

The gross Indian tonnage has increased from 0.19 million in 1947 to 7.05 million in 1999 representing anannual growth rate of 7.2 per cent. In the same period world fleet grew from 83.51 million GRT to 532

GRT representing a growth rate of 3.62 per cent.

The ninth plan (April 1997 to April 2002) envisages increase in the total Indian fleet strength from 6.9million GRT to 9 million GRT. This represents total additional acquisition of 2.5 million GRT andreplacement of 1.7 million GRT. By April 2000 the total fleet strength stood at around 7.1 million GRT.We believe that meeting the planned targets in the next 2 years is quite difficult.

The growth pattern since independence can be divided into three eras:

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Era of slow growth (1947 to1960)Era of rapid expansion (1960 to 1985)Era of decline and stagnation (1985 to till date)

GRT ('000s tonnes)

Annualised

Period Beginning End growth (%)

1947 - 60 192 844 12.11960 - 80 844 5,679 10.01980 - 99 5,679 7,053 1.21947 - 99 192 7,053 7.2

In the first two decades after independence, the nascent state of industrialism in India, absence of a wellsettled policy framework and financial & foreign exchange constraints led to slow growth in Indianshipping tonnage. The annualised growth is highest in this period because of a low base i.e., very small

shipping tonnage at the time of independence. However, in absolute terms, the period represented lowlevels of tonnage acquisition and hence classed as an era of slow growth.

However, the second era especially the period between 1965 to 1980 represented tremendousachievement for the Indian shipping industry in building up a large merchant fleet. The growth wasassisted by liberal financial support by SDFC, buoyancy in global economy, trade and shipping andfavourable government support.

Crisis at a global level triggered by OPEC oil price hike, a regulatory framework in India thatincreasingly proved to be restrictive enough, even though it had supported the growth in the earlier eraand a natural phenomenon of cyclical boom and bust witnessed in all industrial and business sectors, ledto gradual stagnation in the Indian shipping industry since 1980s.

Segments

The Indian shipping industry with over 100 private and public sector companies has a well diversifiedmerchant fleet of tankers, bulk carriers, container ships, specialized or multipurpose vessels, offshoresupply vessels (OSVs) and coastal vessels.

The industry is segmented into three segments for our analysis namely:

OverseasCoastalCargo carrying

Non-cargo carrying (includes OSVs)Bare Boat Charter cum Demise (BBCD)

We have carried out following analysis in this section to assess the strengths and weaknesses of Indianshipping:

Vessel size analysisAge analysisOwnership profile analysisShipyard analysis on the basis of built of vessels

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Overseas

The biggest chunk of the total Indian fleet tonnage is the overseas segment consisting of 241 vessels oftotal cargo carrying capacity of 10.7 million DWT and constituting around 90 per cent of total Indian

tonnage. The change in the structure of the overseas fleet in the last two decades is reflected in thefollowing table.

The most significant change is the fall in dry cargo liners from 170 vessels representing 1.5 million GRTin 1980 to 31 vessels of only 0.38 million GRT in 1999. This number is expected to fall further with SCI,the largest general cargo fleet operator, deciding to gradually exit from the trade due to lowerprofitability. Factor responsible is the gradual containerisation of general cargo.

In the dry bulk cargo fleet there has been stagnation both in terms of the number of vessels as well as thegross tonnage.

Tanker tonnage has shown significant growth in the last two decades. Total number of tankers increased

from 22 vessels to 77, while in terms of GRT, the increase was from 1.02 million to 2.98 million. Duringthis period, Indian shipping appears to have mainly emphasized on consolidation, modernization andacquisition of specialized ship like acid carriers, timber carriers and edible oil tankers.

Massive addition of refining capacity in the country will force a significant change in the oil producttrade. The opening up of the sector to private sector operators has seen the commissioning of the 26million tons Jamnagar refinery of Reliance. The public sector oil companies have also made substantialexpansions in their existing capacities. The total refining capacity is set to touch over 100 million tonnes.The total consumption of refined products was around 89 million tonnes in 1999, which, even afterincreased consumption, is expected to leave a surplus. All this is expected to make India a net exporter ofrefined products. The increased refining capacity is expected to lead to the following changes. Increasedcrude oil shipments. However shipments would be in larger sized vessels as oil companies strive to

capitalize on the economies of scale. Product imports are expected to become negligible. We expect theproduct tanker fleet to fall.

Container traffic is expected to grow significantly in the future as a result of the following factors.Increasing containerisation of general cargo exports from India. Investments in container handlingfacilities in the country. In most of the major ports container-handling terminals have been privatised andinvestments to the tune of Rs. 30 billion have already come in or are expected to in the near future. Publicsector giant Concor has made massive investments in inland container depots. The opening of the sectorto private players is expected to only improve the dry port network in the country. Indian shippingcompanies have immense opportunities because of the above trend.

Liquefied Natural Gas (LNG) shipping is destined to be one of the most lucrative businesses in the future.

India is expected to become a major importer of LNG in the next 2 to 3 years. LNG terminals are beingestablished in various locations like Dahej, Kochi, Dhabol, Ennore, and Pipavav etc. The project forcarriage of LNG for Enron's Dhabol power plant has gone to an overseas company in which SCI holds 20per cent stake. Hence the vessel won't be reflected in Indian shipping fleet. Recent LNG policy by thegovernment calls for a minimum of 26 per cent shareholding by an Indian company for any venturecarrying LNG to India. Further it encourages registration of the LNG vessel under the Indian flag.

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Coastal

The coastal fleet in India consists of 269 vessels of only 0.68 million GRT. The fleet has grown from 0.11million GRT at the time of independence; an annualised growth rate of 3.57 per cent against a growth rateof 7.20 per cent of the entire Indian fleet. The present condition of the coastal fleet (small and aged fleet)

reflects the low level of coastal trade in the country. This is due to competition from roads and railways,and inadequate port infrastructure.

The average vessel size of Indian fleet is much below international standards leading to highertransportation costs and hence lowers competitiveness of Indian exports and higher costs of domesticproduction dependent on imported raw materials. The lower size had been the result of inadequateinfrastructure at ports, lower parcel size of imports & exports and overall lack of competition due torestrictive covenants under M. S. Act.

All this is expected to change in the near future. Huge investments have been made in augmenting portinfrastructure in India. Thus Jawaharlal Nehru Port Trust (JNPT) and Nhava Sheva InternationalContainer Terminal (NSICT) can today handle large sized container vessels. Modern equipments are

capable of faster loading and unloading of cargo. Similarly, a large number of single buoy mooring(SBM's) installed along the coastline of India has paved the way for import of crude by VLCC's. Newupcoming ports in the private sector like Dhamra, can handle very large vessels. The entire process hasbeen expedited as a result of pressure from the exporters and importers demanding lower transportationcosts. Regulatory norms have led to reduce cargo support for Indian ship owners. Thus Reliance importscrude through VLCC's hired from foreign ship owners - a lost opportunity for Indian shipping companies.

Indian ship-owners have yet to effectively respond to this new challenge. Capital requirement forreplacement of smaller tonnage with larger ones is huge and beyond the appetite of domestic equity anddebt market.

Cabotage Laws

All countries for such laws is that a well developed national fleet is critical to every nation's securityinterest by providing essential sealift capability in wartime. The other arguments that are presented insupport of this are jobs, safety and environmental protection.

Additionally, these laws could place re-flagging restrictions where a vessel that had been flagged in adifferent registry in the past might not enjoy domestic trading privileges, as in US and Brazil, even after itis re-flagged in the domestic registry. Subsidies could be extended to the shipowners in various direct andindirect forms to encourage participation in the domestic coastal trade.

Under the cabotage law, transport of goods between two local ports by foreign ships is allowed only ifsuitable domestic ships are not available and special licenses are issued to such ships. This practice is

prevalent in many countries. In India, it is the responsibility of the Directorate General of Shipping (DG)under the authority vested in him by Section 406 of the M.S.Act, to grant license and to ensure the law isenforced.

This policy is entirely on the lines of the Indian National Shipowners Associations (INSA) stand in thematter where, when an application is received for license for operation of a foreign flag vessel on theIndian coast as required under section 407 and section 21 of the M. S. Act, the DG of Shipping decides onit after due enquiry and determination whether suitable Indian owned ship is available for the purpose.Where a suitable Indian ship is available, no permission or license is granted.

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For Container / LASH ships, partial relaxation of cabotage regulations had been granted by thegovernment in respect of operation of foreign flag vessels between Indian ports for a period of 5 years.This has been the point of contention with INSA.

Cabotage laws RegisteredandFlaggedin the same country.

Manned by crew of the same nationality.

Builtandrepairedin yards belonging to the same state.

Ownership by company incorporated and whose shareholders are citizens of the same state.

Indian cabotage laws vis--vis other countries:

Cabotage laws in India are governed by section 407 and 408 of Merchant Shipping Act, 1958. Theseregulations place restrictions on vessel flag and crew. While ownership restrictions were there till a fewmonths back, recent foreign investment promotion policy by the government permits 74% foreign directinvestment in the shipping sector under the automatic approval route and even 100% on a case-to-case

basis has led to the annulment of this clause.

No restrictions are placed on place of built of the vessels, in contrast to the cabotage laws in somecountries as USA, where only vessels built in US yards are eligible for domestic trade. US-built vesselthat is rebuilt overseas also loses its domestic trading privileges.

However, implementations of these laws are alleged to be lackadaisical. The S. N. Kakar Committee onDraft Coastal Shipping Act has observed that deployment of foreign vessels in our coasting trade is aregular occurrence and some quarters have alleged that this is taking place even when adequate number ofIndian ships are available. This is perceived to deprive Indian vessels of the opportunities of rightfulparticipation in the coastal operations Indian National Shipowners Association has also held similarviews.

International comparison highlights that cabotage laws in India are in fact not very stringent compared tosuch countries as USA, Brazil, Greece and Japan. The comparisons made are given in the table below:

Cabotage laws in various countries

India USA Japan Greece Brazil UK Norway China France

Cabotage yes yes yes yes yes some some yes yesCrewingRequirements yes yes yes yes yes yes no yes yesOwnership

Requirements yes yes yes yes yes no yes yes yesDomesticConstructionProvisions no yes no no yes no no no noRe-flaggingRestrictions no yes yes NA yes no NA yes NAFleetSubsidies no no yes no yes yes (indirect) yes yes (indirect) yes

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BBCD vessels and domestic coastal trade

The cabotage laws in India are presently ambiguous with a large number of grey areas. The recentcontroversy relating to domestic trading provisions for Bare Boat Charter cum Demise (BBCD) vesselshighlighted this. The BBCD scheme was launched in the wake of the balance of payments crisis,

primarily to reduce the foreign exchange outgo in outright acquisition of ships and also to help domesticshipping companies acquire vessels through an easier method of financing. From the nations perspective,this method was invaluable in achieving the twin objectives of tonnage enhancement and lower foreignexchange outgo during the foreign exchange crisis in early 90s; since exchange outgo instead of beingoutright, is through multiple instalments spread over a period of time.

Certain development has made the sailing rough for BBCD vessels. First, the government allowed foreigndirect investment of upto 51% under the automatic route in the shipping sector, which was later increasedto 74 % and even 100% on a case-to-case basis. Subsequently, a few foreign companies establishedoperations in India and purchased vessels under the BBCD route, taking advantage of the clause thatallowed such vessels to be treated at par with Indian flag vessels for all purposes including preferences inthe shipment of government cargo and cabotage cargo on the Indian coast even when the vessel is not

flagged in India.

The matter came to a boil in 1999 when Indian Oil Corporation (IOC) invited tenders from domesticshipping companies for transporting petroleum products along the Indian coast. Also, invitation of offerswas made by IOC to companies like Amar Shipping and Pratibha Shipping, whose fleet mostly comprisesships acquired under the BBCD route, whose majority shareholding is held outside India, and which wasopposed by domestic shipowners.

The point of contention - should BBCD vessels be allowed domestic trade?

It is in the negative, as far as the recent decision by the Ministry of Surface Transport is concerned. Thearguments against BBCD vessels were that they being foreign flagged, do not have to satisfy the stringent

norms under the Indian flag. As a result they were in a position to quote a more competitive rate than theIndian-flagged vessels. As a compromise with MOST, Pratibha Shipping would convert all its vesselsinto Indian flag to qualify for coastal shipping.

The National Shipping Policy Committee, after going into the grey areas, has recommended that BBCDvessels in companies where the foreign shareholding is more than 51% should not be eligible forcabotage. This recommendation, however, has become irrelevant now in the light of the fact that 100%FDI has been allowed into the shipping sector on a case-to-case basis under the automatic route.

Has cabotage laws led to complacency on the part of the Indian shipowners and hence deployment ofBBCD vessels would provide the much needed competition to rejuvenate the sector? Indian coastal fleethas stagnated at 0.7 million tons GRT over the last one decade. The average age of the Indian fleet is

almost 20 years. The sector is unable to compete with railways and roads despite having a large numberof inherent advantages.

Two years back, Tamil Nadu government owned Poompuhar Shipping Corporation responsible fortransportation of coal for power plants under Tamil Nadu Electricity Board, filed a request with DG ofShipping for hiring of foreign vessels alleging that Indian shipping lines act in unison and thus do notprovide a 'free competition' environment. Further, vessels are unable to meet the target discharge ratesand thus operate below desired efficiency level.

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Regulation of Indian Shipping Industry

In keeping with the strategic importance accorded to the shipping industry, the Indian government hashistorically on one hand, provided considerable protection to the industry through a scheme of cargo andfreight support. And to bring in a measure of equity and control on the other hand, the government had

also been following a practice of strictly regulating the industry through restrictive covenants in theMerchant Shipping Act, 1958 especially with regard to acquisition and disposal of ships, as well as theattendant financing mechanisms.

A corollary arising from the above is that while the industry depended upon the regulations during itsnascent stages of growth, in its mature state, they proved restrictive and hampered growth. The Indianindustry was stuck with a relatively old fleet and without access to sufficient funds for expansion. As aresult the share of the domestic industry in the country's foreign trade stagnated in late 80's and has neverbeen fully exposed to international competition since.

Liberalization in the Indian economy has been accompanied by lower levels of protection for the industryespecially in the tanker and bulk cargo segments. In addition, funds from existing institutional sources

have been raised in line with prevailing domestic rates. As a result Indian ship owners have been exposedto higher levels of competition. Merchant Shipping Act 1958 provides a basic legal framework forgoverning the Indian shipping industry.

Ministry of Surface Transport

Under the Constitution of India, Merchant Shipping is a central subject and is being dealt with by theMinistry of Surface Transport (MOST) of the Government of India. The Ministry deals mainly with thelarger issues relating to policy and legislation while the Directorate General of Shipping deals with allexecutive matters relating to merchant shipping.

Directorate General of Shipping

Directorate General of Shipping (DG Shipping) comes within the purview of Section 9 of the MerchantShipping Act, 1958. It functions under MOST and is the main regulating authority of Indian ShippingIndustry. However, with increasing deregulation of the industry, its role has also been diluting.

DG Shipping is responsible for issuing licenses to vessels for operating on both international and coastalroutes, as well as for licensing of vessels, which are chartered by Indian citizens, including vessels flyingforeign flags. MS Act also empowers the body to delegate survey work of Indian ships to the IndianRegister of Shipping (IRS).

The Director General of Shipping has the following allied offices and institutions under his

administrative control:

Mercantile Marine Department

Training Institutes - T. S. Chanakya, Marine Engineering & Research Institute, Lal Bahadur

Shastri

College of Advance Maritime Studies and Research

Rating Training Establishments

Shipping Offices

Seamen's Employment Offices

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Seamens Welfare Offices

Regional Offices (Sails)

The DG Shipping also has under his administrative control the First Secretary (Shipping), HighCommission for India in London, to keep liaison with International Maritime Organization (IMO).

The MOST is planning to restructure the DG Shipping and make it into an independent statutory orautonomous body, with powers to regulate and develop the shipping industry.

Mercantile Marine Department

The functions of MMD include survey of ships, safety measures at sea, registration of ships. Shippingcasualties and examinations for grant of certificates of competency to seafarers. In the discharge of theirduties, the Principal Officer and the other officers are subject to the administrative control of theDirectorate General of Shipping.

Mercantile Marine Department (MMD) has offices at Bombay, Calcutta and Madras. The subordinate

offices at Jamnagar and Mormugao are under the Principal Officer of Bombay, at Cochin, Visakhapatnamand Tuticorin are under the Principal Officer of Madras and those at Port Blair and Haldia are under thePrincipal Officer of Calcutta.

Indian Register of Shipping

Indian Register of Shipping (IRS) has been authorized by the Indian government to carry out surveyssuch as Assignment of International Load Lines, and for the issue of Cargo Ship Safety Construction andthe International Oil Prevention (OPP) certificate. While the certification of the above is mandatory, it isnot a stricture on the Indian shipping companies to get their vessels classified under IRS.

The objective of IRS is to evaluate, assess and certify quality management systems in the shipping

industry. Further, the organization establishes standards and formulates rules for the construction andmaintenance of ships, amphibious installations, marine equipment and industrial and general engineeringequipment.

IRS has classed over 700 ships since the time of its inception, with the gross registered tonnage (GRT)reaching 7.2 million tonnes. The organization has now diversified into various other activities andexpanded its scope of services.

The DG Shipping also has under his administrative control the First Secretary (Shipping), HighCommission for India in London, to keep liaison with International Maritime Organization (IMO). TheMOST is planning to restructure the DG Shipping and make it into an independent statutory orautonomous body, with powers to regulate and develop the shipping industry.

Previously the International Classification Societies including Lloyds Register of Shipping, NKK ofJapan and American Bureau of Shipping could issue International Load Line certificates to Indian flagvessels. The government withdrew this permission in the mid-90's and instead has given exclusiveauthority to IRS to issue such certificates to Indian ships. In addition to certification, most of the Indianshipping companies get their vessels classified under Indian Register of Shipping simultaneously.

However, these ships are also classified under a foreign classification society, the reason being thatseveral of these ships are operating in international waters; if they have to take intermediate surveys, IRS

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would not be able to carry these out at a foreign port. Further, IRS is still not a member of InternationalAssociation of Classification Societies and hence enjoys lower acceptability. The government feels thatIndian Shipowners could get IRS services at a much lower rate than those charged by foreign societies.

In any case, we believe that the government must leave the industry free to choose whichever agency it

wants to for load line surveys, consistent with its commitment to liberalization and deregulation. It mustintensify its effort to market its services to both Indian shippers and others and compete with otherclassification societies of international repute in respect of both quality and cost of service.

In order to maintain acceptable standards and provide worldwide coverage for its services, the IRS hasentered into agreements of mutual cooperation with all major International Classification Societies witharrangement of survey all over the world.

National Shipping Board

National Shipping Board is a statutory body set up under the Merchant Shipping Act, 1958 to advice thecentral government on matters relating to Indian shipping.

The board consists of six members elected by the Parliament, four by the house of the people fromamongst its members and the other two by the council of states from amongst its members. The CentralGovernment may appoint to the board other members to represents - central government, ship owners andseaman.

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Seaports

Seaports are the interface between maritime and inland modes of transport for movement of goods andpassengers. In broader terms, ports are a single organizational unit with multidimensional activitiesintegrated within the logistics chain for providing services to maritime trade. The prime objective of a

seaport is to provide fast and safe transit of goods and passengers through its facilities at minimal cost.

Globally, sea borne trade is being made through more than 2,000 ports, from single berth locationshandling a few hundred tonnes to multipurpose facilities handling up to 300 million tonnes per annum.Seaport traffic through out the world has achieved an average growth of 3 per cent per annum in the pastdecade and as per 'Clarkson Research Studies' reached to around 5.36 billion tonnes in 1999.

Port sector in India, comprises of 11 major ports and around 40 active minor and intermediate ports andhandles more than 300 million tonnes of cargo per annum. The sector has witnessed large-scaleinvestment in the past decade with more than Rs 150 billion invested through government and privatesector for the modernization programme.

In the new era of liberalization and privatisation, functionality of seaports is changing from theirtraditional role as an organization in charge of all port activities to become a coordinator of theseactivities. High degree of competition has resulted into reduction of excess labour, aggravated by thetrend towards intensive investment of capital at seaports through private sector participation.

Free Ports / Free Trade Zones

A free trade zone has been defined as a specified area where trade is based upon the unregisteredinternational exchange of goods, with customs tariffs used only as a source of revenue and not as animpediment to trade development. Free ports are thus onshore enclaves treated as customs free zones ortechnically as foreign territory for tax purposes. They are designed to attract overseas traders andmanufacturer to set up business. Duty is payable only when goods move into the host country.

Goods which from are imported from abroad are not subjected to any domestic tariffs, duties orregulations until they actually leave the free port. If their destinations until they actually leave the freeport. If their destination is another foreign country, they are permitted to leave the free port without theburden of the customs dues which they would have incurred at any point. If the Imported goods leave thefree port for a destination in the same country, they are taxed on leaving the free port as if they had justarrived from abroad.

The concept of the free port is that of a focus to attract investment, which will stimulate the domesticeconomy. It is intended to attract foreign goods to receiving centers located with in it, at whichinspection, packaging, sorting, labelling and reshipment will take place. The free port thus aims tobecome an entry pot.

Facilities on Ports

The facilities available at the Multi-Purpose Berth at present are capable of servicing Conventional CargoCarriers, Self-sustained Container Carriers, and Ro-Ro Car-Carriers, which usually ply the trade routes inthis region.

The access to the commercial berth is through a dredged canal 2.6 kilometres long and which could

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accommodate Vessels with a maximum draught of 9.5 metres. The depth alongside is 10 metres, and iscapable of accommodating second generation Containerised Vessels.

The Berth planning unit provides a scheme whereby Mother/Feeder Vessels are given priority services tomeet their critical shipping schedules.

The Refrigerated Container facility at Terminal should provide universal plug points to cater for importedas well as transit refrigerated cargo. To assure a very high quality service for this expensive cargo, theReefer facility will be fully backed up by a Reefer Container monitoring service. This will guarantee theShipper/Consignee that the cargo is maintained at the required critical temperatures during the full transitperiod. An independent power supply source is available to ensure continuous power supply for the safetyof the cargo.

Storage Facility

The total terminal facility should cover a container stacking area of maximum square metres. For moreversatility in operations, the yard equipment will be backed by a fleet of the latest Reach Stacker

Machines, which could meet any unexpected downtime due to breakdown of yard gantries.

Warehouse Services

The Ports Department should provide Long Term storage Warehousing facilities for use by Importers andExporters. This facility is situated just outside the Port Premises, and is considered an asset to the majorImporters. With the Customs Department situated within the same port complex, it provides easyprocessing of documents, as well as low transport costs to the operators. Whilst the occupancy levels areat optimum, studies are being carried out to improve on the services and facilities provided.

Mechanical Handling Equipment

Rubber Tyred Gantry Cranes (Transtainers)Valmet

Side Lift Fork Lift Trucks for Empty Container Handling

Caterpillar

Container Handling

Caterpillar

Sve Truck

Kalmar - Reachstacker

Prime-Movers for Container Haulage

Mitsubishi-Prime-Mover

Prime-Mover-Container

Terminal Tractor

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Cargo Handling Forklifts

Caterpillar

Marine Craft

Tug Boat

Pilot Boat

Dredger

Security and Safety

Fully fenced perimeter and independent Gate House for better security and easy access. The High-mastsecurity lighting should locate at all vantage points, and also backed by a stand-by generator forcontinuous power supply.

The entry of personnel into the Terminal will be strictly controlled by way of approved entry permits.These permits will be issued and checked by the Ports Department Security personnel who will bemanning the gates on a 24-hour roster system. The safety and security of the cargo will be furtherenhanced with the installation of a closed circuit television system (CCTV), within all areas accessible tothe public, and the operating staff.

The Terminal is also equipped with the latest in Fire detection equipment, and adequate Fire fightingequipment. Additionally, the fully equipped Fire Station should situated just outside the Port, with it'sown Fire personnel; will have immediate access in any contingency.

Entry to, and exit from the Port premises is subject to documentary and Physical checks. Therefore it is

strongly recommended that persons who wish to enter the Port premises should have in their possession avalid entry pass.

For Bona-Fide Visitors, these passes could be obtained at the Port Gate-House, on production of a valididentity document. All cargo movements to/from the Port are subject to the normal security procedures,which are carefully but expeditiously carried out by the Ports Department Security Section.

Container Terminals Handling

Services details

Container Terminal has been required to offer container logistics and to assist shipping lines inproviding quality services.

The terminal should situate near the port.

The terminal is fully equipped with the most modern and efficient container handling equipment.

Computerized operation allows to offer the unique services of receiving the empty / full containers aswell as the storage and delivery facilities to shippers of shipside.

Handling and delivery of full containers to the respective consignees, which is shipped on the"door to door" basis.

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Providing handling and storage facilities for our clients, both for the import and exportcontainers.

Haulage of containers to and from the consignees' warehouses to the Globe.

Terminal and ultimate delivery to port for shipment.

Stripping and re-stuffing of the containers.

Cleaning and repairing of containers.

Marine services should offers following comprehensive range of services:

Warehousing / storage (long term / short term) & distribution

Expert packaging & crating

Procurement - local & international

Custom clearance for exports & import cargo

Container dept / terminal services

Bulk transport

Special services for projects

Removal of household goods/personnel effects on door-to-door basis Insurance

General cargo

Ambassadorial movements

Office re-locations

Compound & villa movers

Indian Scenario

Indian port sector comprising of 11 major ports and 139 minor and intermediate ports (of which around40 are currently active), handles more than 300 million tones of cargo annually. Major ports are parastatalbodies formed on the basis of Major Port Trusts Act, 1963 and provide service to an exclusive hinterland.On the other hand minor ports, under the control of State Maritime Boards, were minor in their role until

a few years back and never competed either with the major ports or amongst themselves. However, thingshave changed in recent times with the opening up of the domestic port sector to private operators.Entrusting private operators to manage certain terminals within the ports through concession agreementshas led to the gradual privatisation of Indian major ports.

With intense competition, the role of Indian ports is changing from a Service port model, where owningof port infrastructure, superstructure and providing of services are borne by port itself to a Landlord portmodel. Growing demand for handling of large size vessels through out the world has also madesignificant impacts on the domestic port sector by making it one of the major parameters of competitionbetween existing ports and new ports. While Mundra port in Gujarat has already been commissionedhaving deep draft to berth large vessels, all the new port projects in the pipeline viz. Dhamra, Orissa;Gangavaram, Andhra Pradesh; Karwar, Karnataka would be deep-water ports.

Owing to greater awareness of increased role of the market forces, steps have been taken to providegreater managerial and operational flexibility to the major ports thus leading to corporatization.Government has also moved forward with the plan to corporatize all the major ports gradually therebyleading to increased efficiency, financial and operational autonomy and subsequent privatisation. EnnorePort has already been registered as a company under the Company's Act, 1956 and similar attempts are onfor Jawaharlal Nehru Port and Haldia Dock Complex.

Keeping with the global trend, nearly Rs. 150 billion investments have been made till date, much of it inthe last few years, to modernize facilities in existing ports and build new facilities. Gradual opening up of

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the Indian economy coupled with the regulatory changes in port sector and a considerable gap betweendemand and supply of port facilities have encouraged and facilitated such massive investments in thissector.

Indian port sector has shown substantial improvement in the last one decade by way of port facilities andcargo handling. Trade volume of the country has been growing at an annualised rate of 7% over the past

decade and cargo traffic at Indian ports is expected to reach around 537 million tones by 2006-07. Tomeet this huge demand, massive investment is expected for developing new port facilities through privatesector participation with a gradual shift to 'Landlord' type of functioning.

The Indian economy has however shown fall in the growth from 6.8% in FY1998-99 to 5.9% in FY1999-2000. The fall mainly reflects a slow down in agricultural production after previous years bumperharvest. However, activities in the industrial and services sector strengthened during the year, buoyed bya revival of exports and the pick up in domestic demand. Thus, the growth in GDP from the industrialsector accelerated to 6.9% from 4.0% in the previous year, while services grew at last year's level of8.2%.

Both imports and exports measured in USD have grown by 8% in FY1999-2000. In contrast, exports fell

by 4% in 1998-99 while imports grew by less than 1%. This trend is reflected in terms of volume of cargohandled by major ports, which grew by 8% in FY1999-2000 against stagnation in the previous year.

Stevedoring and Warehousing

Transy designs and co-ordinates technological schemes for reloading and securing of heavy-lift and out ofgauge cargoes on rolling stock. It makes customs confirmation of shipping export cargoes. It lashes,secures and separates cargoes on transport means.

provides logistics scheme of transportation

organizes the handling/stevedoring and storage of cargo.

arranges customs clearance of cargo or registration of cargo according to the procedure ofcustoms transit.

arranges weighing of cargo in rail wagons, trucks or tally, sorting out and marking. arranges the examination of cargo quality (Grain State Inspection, veterinarian supervision,

phitoquarantine control, etc) issuing certificates

provides issuing of the set of cargo documents (B\L, railway bills, cargo reports, generalstatement of discharging of vessel /outturn report , etc.)

states of shortage/surplus and damage to cargo.

arranges monitoring and search of railcars

arranges insurance of cargo on behalf of the Customer

arranges further distribution by sea and river transport, truck and railway

Custom Clearance of Import Consignments

Documentation

The documents, which are mainly required for customs clearance, are:

a. Invoiceb. Packing Listc. Bill of lading/Air way Billd. Purchase Order

e. Country of origin certificate import of 2ndhand goods)f. Chemical test certificate

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g. Insurance Certificateh. Freight Certificatei. Technical Write up/Catalogue/Drawingj. Chartered Engineers Certificate

a. The invoice is the most important document required for customs clearance. It should clearlyindicate the item supplied. In case of more than one item, the value should be clearly indicateditem wise. If the item comes in completely knocked down condition, it should be mentioned inthe invoice. The value should be a single value in this case covering the entire consignment. ITOthe extent possible the BTN (Brussels Tariff Nomenclature) heading should be given for easyclassification of the item. The invoice should also indicate the electrical rating of the electricalitems.

b. The packing list is another vital document with the help of which the volume of the consignmentand contents per package can be determined. Therefore the details of packing should be proper itcan be determined the exact no. Of packages, its volume and weight.

c. The Bill of lading/Air waybill is the receipt issued by the carrier. It also gives the details of theconsignment. The import clearance document is prepared and submitted to customs on the basis

of this document.d. The purchase order is issued by the indenting department and raised on the supplier for sending

the materials. In our case the purchase order is raised on M/S Tata Ltd, London, our overseasbuying agent who in turn raise another purchase order on the supplier for supplying the materials.

e. Country of Origin certificate is another vital document, which is required for customs clearance.It gives the details of the place/country of manufacture of the item imported.

f. Chemical test certificate is generally required for import of raw materials from which thechemical properties of the product can be found for customs classification/ duty rate.

g. The insurance Certificate gives the details of the insurance of the item and also gives the detailsof the premium amount paid. This amount is added to the FOB value of the material.

h. The freight certificate gives the details of the freight amount paid for the imported material. It isgenerally issued by the overseas carrier/agent. In case the Bill of lading is issued on Freight

Payable basis, then the local Agent collects the freight amount. A Bank certificate is required inthis case for remittance purpose.

i. The technical write up/catalogue/drawing is required for explaining the function of the itemimported. It is also required for correct classification in terms of the Customs Tariff.

In case of import of any 2nd hand item, it is compulsory to produce this certificate for proper valuation ofthe item as per Customs law.

Classification of Import Items as per Custom Tariff

Customs classification is the main thing by which the duty rate of the import item is determined. Customsclassification is mainly done on the basis of the use of the items sought to be import barring few caseswhere duty rate is determined from the material of construction. Reading together the wording of the

relevant section notes, chapter notes and the tariff headings also determine classification. Therefore it isextremely important that the import items are classified properly for the purpose of paying duty correctly.The two main documents required for the same are - 1.Purchase order 2. Invoice. The duty rate is takenfrom the Customs Tariff book (both Customs & Central Excise).

1. The purchase order should clearly mention the item sought to be imported giving the FOB value.It should also give the details of its function i.e. whether it is a part of machine or it is equipmenthaving individual function. If the item is a part of a machine then it will be classified as a part ofthat machine and the duty rate will be with reference to the duty rate of that machine. If it is

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individual equipment, then it will be classified, as equipment and the duty rate will be based onits functions. In addition to this the material of construction should also be given.

In addition to the above, the following details should be incorporated: -

a. Name of the indenting Departmentb. Final destination of the cargoc. The Marks & numbers to be embossed on the packages.

A Technical write up should be attached giving the technical details of the item, especially in case ofelectrical items the electrical parameters i.e. the voltage & ampere should be given.

In case of import of multiple items against a purchase order the details should be given item wise alsoindicating the value item wise. The technical write up should also give the item wise technical details.

A copy of the purchase order should be sent well in advance to TKM Division. In case of anyamendment, an amendment advice should be given.

2.The supplier should be advised to prepare the invoice with reference to the purchase order only. The

supplier should indicate the value clearly. The terms of the payment should also be clearly indicated inthe invoice. If multiple items are imported against one invoice, the item wise value should be given. Incase of free of charge supply, a nominal value for customs purpose should be given and it should beclearly mentioned in the invoice that the items have been supplied free of charge. In case of replacement,the replacement details should be given in the invoice.

Clearance Procedure

Import clearance procedure has been computerized by Customs with the incorporation of E.D.I. system(Electronic Data Interchange system). Under this system the entire customs formalities are done throughthe computerized system. Importers are only required to submit one declaration in a specified format.After completion of the clearance formalities, computer generated duplicate & triplicate copy of the Billof entry is given to the party. The duplicate copy of the Bill of entry is the importers copy to be kept bythe party for future correspondence. The triplicate copy is the exchange control copy, which is required to

be submit to RBI for remittance purposes. Duty payment formalities have also changed. Nowadays, theduty payment advice is also generated through the computer. The duty amount is deposited in the bank.The fund is then electronically transferred to Customs account. Manual processing is still done for certaincategories of import. Import of goods under DEPB scheme is one of them.

In order to expedite clearance of goods, it is permissible now to file the import bill of entry 30 days inadvance of the expected date of arrival of the vessel or the aircraft the processing can be completed andthe document can be kept on hold for final noting. On arrival of the vessel/aircraft, the B/E has to besubmitted for final noting and after final noting duty can be paid. The rate of exchange applicable will bethe rate prevailing on the date of filing the advance B/E. If the ship /aircraft does not arrive within 30days, the advance B/E will cease to be a legal document and a fresh Bill of entry will have to be filed. Inthat case, the rate of exchange and the rate of duty etc. would have to be regulated by the date of

presentation of the new B/E.Import of 2nd hand Goods

Import of any 2nd hand item is restricted as per present import-export Policy. It means that Special Importlicense is required (for 5 times of the CIF value of the item). In addition to this a certificate from a listedAgency is required giving the details of the item including the year of manufacture, the price of the itemin the year of manufacture, the condition of the item, details of the reconditioning of the item and thepresent market value. This value is verified by customs as per their procedure and then the assessments

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done. Normally, the rate of depreciation of value as allowed by customs from the year of manufacture isas follows:

a. For the first year 16%b. For the 2ndyear 12%

c. For the 3rdyear 10%

For the 4th year & thereafter 8%

Valuation - Imported Goods

Most of the customs duties are ad-valorem. Therefore the goods are to be valuedfor the purpose of assessment. The relevant statutory provisions are section 14 ofthe customs tariff Act 1962 and customs valuation (Determination of price ofimported goods) rules 1944 framed under section14 (1a) and brought into forcew.e.f. 16.08.1988, commonly referred to as valuation rules. These rules followthe GATT and WTO provisions where under the transaction value or the invoice value is taken for thepurpose of assessment. Unless the invoice price already includes ocean freight and insurance, these

elements have to be added to make it CIF value: -

1. For Air cargo: Actual airfreight, but not exceeding 20% of FOB value.Where actual sea/air freightIs not ascertainable: 20% of FOB valueWhere actual insurance is not ascertainable: 1.125% of FOB value.

Landing charges is to be taken as 1% of CIF value to get the assessable value for the purpose ofassessment.

In case of collaboration agreement loading of 1% of the assessable value will be done and the customswill resort to provisional assessment till the valuation certificate is obtained.

Demands and Refunds

If customs duty happens to be short paid or excess paid, there is a provision to demand from, or refund to,the importer the differential amount provided the demand or claim for refund is made within six monthsfrom the payment of duty. In case of goods exempted by order under section 25(2) of customs act 1962,the limitation of six months for refund will be computed from the date of issue of such order. In casewhere the duty is paid provisionally, the limitation for refund shall be computed from the date ofadjustment of duty after the final assessment thereof. Refund claims for duty and interest should be filedaccording to the prescribed format as directed by customs. In case of wilful mis-statement or suppressionof facts by the importer or collusion, the time limit for customs demand gets extended to five years.Section 27 is relevant for refund claim & Section 28 is the relevant section for Demand from Customs.

Warehousing

If the importer does not want to use the entire stock immediately or he is not in a position to pay the full

customs duty liveable on the goods, he can file an into bond Bill of entry for warehousing of the goods.Public warehouse run by central ware Housing Corporation or by state warehousing corporation has comeup at all centres. In certain case customs allow licensing of private bonded warehouses. In our casecustoms have given us license to convert a portion of our godown at LGR Jetty as private bondedwarehouse. The goods can be cleared for Home consumption on payment of duty by filing Ex-bond Billof Entry. Except for capital goods intended for 100% export oriented units, warehousing is allowed for aperiod of one year only suitably reducible for perishable goods and extendable for other goods byCommissioner of Customs for six months and by Chief Commissioner thereafter provided the goods arenot likely to deteriorate during the extended period. Interest on warehouse goods at a flat rate of 24% is

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chargeable after completion of six months of warehousing period. Interest is not payable for over-stay ifgoods at the time of removal from warehouse were duty free.

Duty Entitlement Pass Book Scheme (DEPB)

This scheme is patterned on the credit- debit system of central excise cenvat scheme is scheduled to phaseout by March 31, 2002. Under this scheme, exporters are granted duty credits on the basis of pre-notifiedentitlement rates, which will allow them to import inputs duty free. The exporter can export any productunder the DEPB scheme provided the same is covered by the standard input-output norms. However, preexport DEPB scheme stands abolished. The importer has the option to forego exemption from CVD andpay the CVD in cash so that he or the customer can claim cenvat credit. Goods in the negative list ofexim-policy cannot be exported. Passbook credit can also be used for paying duty on (1) SIL imports and(2) import under other schemes like EPCG scheme or project imports, thereby availing the exemptionfrom the special additional duty of 4%. In case the imported goods are eligible for another partialexemption from payment of duty, such exemption would also be applicable to goods imported against aDEPB scrip.

In case of goods imported under DEPB scheme found unfit for consumption, the commissioner mayallow their re-export and grant a DEPB entitlement certificate equal to 98% of DEPB credit debited at thetime of their import. If export proceeds are not realized within six months or such extended period as maybe allowed by RBI, or are short realized, the passbook holder should pay in cash an amount equivalent tothe amount of credit obtained against such exports or against the value not realized. However post exportDEPB is transferable without waiting for realization of export proceeds in respect of shipments againstirrevocable letter of credit. DEPB scripts cannot be utilized for import of capital goods.

Drawback

An alternative option of Duty drawback is also available under which products made out of duty paidinputs are first exported and thereafter refund of duty is claimed. Drawback of 98% customs duty(including anti dumping duty) can be claimed if imported goods are re-exported as such within thespecified period as per drawback rules. In respect of claims filed on or after 08.01.99, customs should pay

the drawback within two months of export or pay interest thereon for the period of delay. Details aregiven in Section 74 &75 of Customs Act 1962.

EPCG Scheme

Import of capital goods at 5% concessional rate under EPCG scheme, subject to export obligation is nowapplicable to all sectors and to all capital goods without any threshold limit. No payment of additionalcustoms duty and special additional duty applies. The scheme has also been extended to identify servicesectors also. There is an across the board stipulation of FOB export obligation of 5 times of CIF value ofimports (or 4 times the CIF value of capital goods on a net foreign exchange basis) which is to be fulfilledin a period of eight years. Relocation of imported capital goods in the factory of the supportingmanufacturers and service providers is permitted provided their name and address is endorsed on thelicense. A person holding EPCG license may also source capital goods from a domestic unit instead of

importing them, at the same rate of duty. In return the domestic unit would become eligible for import ofcomponents for manufacture of capital goods. He can also replenish the components after supply ofcapital goods to the EPCG license holder. Where drawback is claimed, export does not count fordischarge of export obligation under EPCG scheme.

Project Imports

In exercise of the powers conferred by section 157 of Customs Act 1962 and in suppression of the projectimport regulation 1965 this regulations have been made. These regulations shall apply for assessment andclearance of the goods falling under heading no.98.01 of the first schedule of the customs tariff Act 1975.

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The assessment under the said heading shall be available only to those goods which are imported againstone or more specific contracts, which have been registered with the appropriate custom house in themanner specified in the regulation 5 and such contract or contracts has or have been so registered beforeany order is made by the proper officer of customs permitting the clearance of the goods for homeconsumption or in case of the goods cleared for home consumption without payment of duty subject to re-

export in respect of fairs, exhibitions etc .duly sponsored or approved by the Govt. of India or Trade FairAuthority of India, as the case may be, before the date of payment of duty.

The benefit of import under project is available for new expansion or substantial expansion of an existingplant, which will increase the existing installed capacity by not less than 25%. Under this scheme plant,equipment can be imported with spares (Subject to 10% of the value of the main equipment) under thesame customs tariff heading thereby saving Customs duty.

Import of Design & Drawings

Import of Design & drawing is related to import of drawing related to plant and equipment or forupgradation of an existing plant. As per customs valuation rules, the value of the imported design &drawings have to be included in the value of the imported main equipment if the same is found to be

engineering drawings and they are found to be related to the import of main equipment. But erectiondrawings can be cleared duty free as per CEGAT judgement under Customs tariff heading 49 and thevalue shall not form a part of the value of the imported equipment. Other drawings can also be clearedduty free provided they are not related to import of any major equipment. Nowadays import of Design &drawing is allowed through the e-mail route but remittance cannot be made unless they are customscleared.

MODVAT / CENVAT Credit

Modvat scheme is being replaced by a new Cenvat scheme w.e.f. 1 st April 2000. In the new scheme bothinputs and capital goods have been covered in the same set of rules. Under the new scheme, all finishedgoods except matches would be eligible for Cenvat credit. Similarly the scheme is being extended to allcapital goods. Restrictions of 75%, irrespective of capital goods credit on project import heading havebeen removed. Capital goods will now be eligible for credit of additional duty also.

Cenvat credit will be available for duty paid inputs or capital goods received and used in the factory. Thiscredit may be utilized for payment of duty of excise levied under the first schedule on any final productmanufactured by the manufacturer. The cenvat credit will not be allowed in respect of that part of thevalue of capital goods which represents the amount of specified duty on such capital goods, which themanufacturer claims as depreciation under section 32 of the income tax act 1961 or as revenueexpenditure under any provisions of the said income tax act. The cenvat credit shall be allowed even ifany input or capital goods are sent to a job worker for further processing, testing, repair or any otherpurpose and it is established from the records produced by the assess that the goods have been receivedback in the factory.

If a manufacturer of a final product shifts his factory to another site or the factory is transferred onaccount of change of ownership or on account of sale, merger, amalgamation, lease or transfer of the

factory to a joint venture with the specific provisions for transfer of liabilities of such factory, then themanufacturer shall be allowed to transfer the cenvat credit unutilised in his accounts to such transferred,sold, merged, leased or amalgamated factory. The transfer of the cenvat credit under the above shall beallowed to the extent of credit contained in the stock of inputs as such or in process, or the capital goodsalso transferred along with the factory.

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Economics of Ship Operation

The economics of ship operation today warrant close attention by management to ensure that the serviceprovided is viable, competitive and best suited to the market requirements, having regards to safety,statutory obligation services standards. This entails careful evaluation of a wide range of elements.

The constituents of the voyage estimate can vary by some 10 per cent owing to price changes and willdiffer according to the type and will differ according to the type and age of the ship and the country ofregistration. For example, a passenger vessel will have a larger crew than a cargo ship, so that crew costwill account for a greater proportion of the total.

a) The cost of fuel oil is 25.6 percent of the total. Fuel economy is therefore a crucial consideration inscheduling. In the next few years research will be undertaken to devise more economical ship machinery

and hull designs to produce the optimum speed compatible with the most favourable fuel consumptionlevel.

Items Percentage of total costs

Fule oil 25.6Lubricating oil 0.9Engine maintenance 1.2Hull Maintenance 4.0Crew Costs 25.0General administration 0.4Insurance 8.0

Capital Cost (depreciation, interest charges, etc.) 30.2

(b) In the example, capital charges come to about 30 percent of the total. Ship owners from countriesthat offer loans it low rates of interest and subsidise for building or operating vessels will not face such aheavy burden; this applies especially to the Eastern bloc and developing Countries.

(c) Crew costs represent one quarter of total costs. This important subject is treated at greater length in thefollowing section.

It is apparent from this brief analysis of the table that vessels operating in subsidized fleets and/or payinglower wages have significantly lower voyage costs and are therefore at a competitive advantage.Moreover, many of the rapidly expanding fleets that falls into this category - particularly. Those of India

and China - have been built up by purchasing second-hand modern tonnage at low prices, a fact thatfurther boosts their competitiveness. Against this back ground it is essential that the fleets of the Westernhemisphere operate on, the principle of the commercial freedom of the seas.

Ship Operations

The vital link between the marketing abilities of a shipping pool's commercial department and thefinancial records, statistics and guidance provided by an accounting division, is that supplied byoperations staff. Like their counterparts in the other sections of a pool's administration, operations

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personnel must behave on the one hand as charterers but also act on behalf of shipowners, or as therepresentatives of disponent owners. Also like their counterparts, they must understand the relevance oftheir skills within the general format of a pool's management structure, appreciating the importance of co-operation and teamwork to the success of the Organisation.Particularly in the case of operations staff, however, the need for teamwork and co-operation extends

beyond the limited confines of a pool office and its personnel, to include amicable liaison with thoseresponsible for the ship management of members' vessels, and with the officers and crews manning theships themselves.

The background of a pool's operational staff may be as varied as the tasks they undertake, but certainlyamong their talents should be a thorough knowledge of the ships with which they are involved, supportedby seagoing experience on the part of at least one or more staff. Their abilities should also be such thatthey can assist and provide guidance to commercial personnel in technical aspects of the negotiation ofcharter parties and contracts, as well as help financial staff prepare freight and hire statements; check portdisbursement accounts; and negotiate fiscal transactions with shipowners and charterers alike.

There should also be sufficient personnel to allow for the frequent travelling that will be required, not

only simply to visit ships and, perhaps, to assist with the handling of particular cargoes, but to meetoutside associates such as port agents, and to call regularly on those filling comparable roles in the officesof the husbandry managers of pool members and those companies operating vessels on period timecharter to the pool, as well as meeting the staff of Cargo contactors, shippers and receivers. They maywell be called upon additionally to accompany commercial representatives of a pool on marketing visitsto outside organisations. Obviously, given this substantial travelling workload, there must be sufficientoperations staff to ensure that a pool office is always adequately manned by experienced personnel, as tofail in this respect not only opens the pool's operations to the risk of serious problems but creates a poorimpression to outside personnel seeking guidance, replies to queries, or whatever.

Furthermore, it is vital that operational staff manning the head office of a pool and responsible for thesmooth running of its many and varied undertakings, should be, in Constant touch with that office. It is

therefore important that a company home telephone arrangement is available, and after-office hourscommunication details regularly updated and passed around to ships' masters and all those havingoperational business with a pool. With a computerised office, it is equally essential that, via telephonemodems, a link is established between a home computer terminal and Office equipment for certainOperational staff, enabling them to be in easy reach of the information available in a pool's computerisedrecords, as well as being able to utilise the computerised telex system, both to peruse incoming messagesand to transmit telex messages when necessary. Mention has already been made of the varied tasks thatrequire the attention of a pool's operational staff, made more complicated than might be the case in atypical ship owners office because of the need for a pool's personnel to consider aspects from theviewpoint of being the representative of shipowners, disponent owner and, perhaps, charterers. It wouldprobably be of benefit to the reader to describe these tasks in greater detail, first studying the importanceof good communications.

COMMUNICATIONS

The importance of effective communications between merchant ships and those responsible for theiroperations cannot be stressed too highly. Increased efficiency, more effective management and loweroperating costs will all result if modern equipment such as satellite communication is installed on boardmerchant ships, and though this technology is not cheap, its cost compares favourably with current freightlevels and its use should be encouraged by a pools management even to the extent that it is mandatoryfor all pooled vessels to be so equipped, Certainly, potential changers of merchant ships-pools among

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them-should count this facility as a major consideration when comparing beneficial and adverse aspectsof ships that may be proposed to them for period employment.

Unfortunately, there remain various ports and, indeed, nations around the world where communicationsvia shore personnel and facilities can best be described as inadequate and, in some cases, abysmal.

Nevertheless, because of the general unattractiveness of such regions of the world, freights are often highto compensate for port delays and other difficulties, poor communication among them. So anOrganisation fixing to such parts can gain a distinct advantage compared with rivals indulging in the samebusiness by at least being able to communicate easily with those on board their own vessel and in thisway being alerted to any local problems and, of equal importance, to the readiness of the ship for her nextcargo. But modem technology on board merchant ships is only, part of the matter. Enough has alreadybeen written in preceding chapters for the reader to note how essential it is for a modem office, providingthe facilities required for commercial operations in today's marine environment, to be equipped with thelatest in computer and telex technology, combined with an adequate telephone system and telefaxservices. The saving in time and convenience will far outweigh the cost factor, provided care is taken inthe choice of equipment.

OPERATIONAL DUTIES

The basic operational duties of the staff of a shipping pool will emulate the tasks undertaken by the staffof any 'traditional' shipowners, but in addition will encompass the duties that would be undertaken byoperational staff working for an operator (disponent owner) and also for a cargo contractor.

As in all shipping organisations records must be maintained and, in the case of a pool and aided bycomputerisation, these should be comprehensive. Details of ship movements, cargoes loaded, bunkerstaken, port agents used and vessel performance must all be entered into the computer system on daily,hour-by-hour basis. Intelligent persons without seagoing experience are quite capable of achieving anexcellent standard of accuracy and understanding of the import of the material they are dealing with, butall operation staff must be aware of the innermost working of the computer facilities provided for them, in

order to gain the maximum benefit.

A proper computer software facility should allow interesting recall variations of this data and lists shouldbe available, virtually at the pressing of a sequence of keys, of, for example, grain cargoes loaded; or fleetvessels visiting the Panama Canal and dates Of transit; or the voyage history of one particular ship; orwhatever. Regular information that computerised records can produce would include fleet position listsand port agents' details, again available at the touch of a sequence of terminal keys.

Unfortunately, computerised records do not do away with the nee

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Emerging Challenges of Commercial Management of Shipping Industry