Models of such funds operational else where such as the BNDES Brazil and Maritime Development Fund Malaysia are carefully being studied.
An option being considered is to establish a dedicated maritime vertical under the National Bank for Financing Infrastructure and Development (NaBFID), the newly formed Development Finance Institution (DFI), to house the fund. The planned vertical will have a team of sector experts for project appraisal and evaluation.
The second option being considered is to create the fund as a separate company with equity fully contributed by the Union government and multilateral/bilateral financial institutions. Multilateral/bilateral agencies could take majority ownership of the company (over 51 percent) to pierce sovereign rating. The remaining equity is proposed to be initially held by the Ministry of Ports, Shipping and Waterways (MoPSW) directly or through one of its affiliated companies. This will enable superior rating and the MDF would be able to raise resources at a more competitive rate than what Indian entities/sovereign entities would be able to raise globally and domestically.
The mother fund, per the plan, will comprise a Non-Banking Finance Company primarily involved in lending activities, investment vehicle/alternate investment fund that will participate in a project as an equity investor and an Asset Reconstruction Company (ARC)/Distress Fund to deal with the recovery of Non-Performing Assets (NPAs) from the books of secured lenders and unlock the value of NPA’s, according to a document seen by ET Infra.
This will require amendments to the existing regulations (NBFC-IFC, AIF, ARC) for efficient operation of MDF.
To create long term sustainability of the fund, revenues from maritime projects such as vessel related charges at ports will be ring fenced besides aligning policy for facilitating revenue from operational projects to flow to the fund.
Guidelines will be put in place for evaluating projects, its review mechanism, disbursement targets and timeline for disbursement.
The fund will have an institutional structure to ensure robust implementation and a mechanism for coordination amongst various nodal agencies.
The proposed maritime development fund is a “good idea” that covers shipping, ports and shipbuilding, says Divay Goel, Founder and Chief Investment Officer at Singapore-based Prudent Shipping Investments Pte Ltd.
Shipping and shipbuilding in India, according to Goel, are the two “more needy areas where international financing is scarce”.
“However, the administration of the fund, specifically for shipping should be equity focussed considering the cyclical and volatile nature of shipping earnings and values. To administer loans basis assuming shipping is akin to infrastructure would be wrong. Shipping is a different beast and absolutely opposite in nature to stable infrastructure. The maritime development fund should take an equity type outlook for administering funds to shipping rather than as a fixed interest rate product,” Goel suggested.
Globally development of shipbuilding has always been supported by government subsidies whether or not the respective nations admit it, he said.
In ports, the development fund can choose to have a lower focus as Indian ports are already well liked by international financiers, Goel added.
Challenges
Despite introduction of 100 percent foreign direct investment (FDI) in shipping, tonnage tax regime and various incentives like a so-called right of first refusal (RoFR) for Indian cargoes and coastal cargo reservations, there has been no appreciable increase in Indian-flagged tonnage.
“The financing of projects in the maritime sector, particularly for buying ships, is a challenge primarily due to lack of long-term capital at competitive rates,” said a government official involved in the exercise.
“There are issues such as lack of domain expertise in existing domestic financial institutions, stringent terms of domestic loans for small and new shipping companies and higher collateral requirements by domestic banks/financial institutions which restrict financing in the maritime sector,” he stated.
Indian lenders often insist on real estate collateral for processing shipping loans, an executive with a global shipping company that operates in India said. “Indian lenders don’t understand that in ship financing, the collateral is the ship itself,” he said.
Indian fleet owners suffer from high interest rates compared to other countries (16 percent in rupee terms or LIBOR+600 bps in US dollar terms compared to LIBOR+100 bps in US dollar terms for foreign shipping companies) and low debt tenures (6-7 years versus 10-12 years for foreign shipping companies) in relation to the life of vessels, resulting in a lack of level playing field as foreign shipping companies compete directly with Indian ships for India’s export-import (EXIM) and coastal cargoes.
“Indian ships have to be internationally competitive,” said a second shipping industry executive.
Currently, the cost of funds for vessel financing is high and debt tenure is low vis-a-vis life of the vessel/barge (15-20 years for coastal; 25-30 years for inland). These factors affect the ability of Indian ships to compete as the cost of servicing loans is much higher compared to foreign ships, he pointed out.
Shipping sector is also not considered as an ‘infrastructure’ sector despite having long useful lives of 15-25 years.
“Because of this, both banks and financial institutions do not address capital intensive industries such as ship financing and leasing,” the official said.
Further, with shipping not recognised as an ‘infrastructure’ sector, it would not come under the ambit of the National Bank for Financing Infrastructure and Development.
The maritime sector, hence, requires a dedicated institution with sector specific experts for project appraisal and ability to provide low-cost, long-term capital, the industry executive said, noting that this would help boost Indian tonnage and promote ‘Atmanirbhar Bharat’ in the shipping sector.
The shipping sector, he said, has the potential to stimulate the economy through its backward and forward linkages and contribute significantly towards job creation.
“The constraints in accessing low-cost, long-term capital by a large segment of the maritime sector in India on the one hand, and the need for large financial resources to meet the investment needs in line with the declared aspirations of the government to develop a vibrant maritime sector on the other hand, necessitates the need for a comprehensive approach,” the government official mentioned earlier said.
The government, he said, had previously set up several sectoral Financial Institutions (FIs) such as PFC Ltd, REC Ltd, IRFC Ltd, HUDCO Ltd and NHB to cater to the large and specific financing requirements of infrastructure sectors such as power, railways and housing, which led to their well-rounded development.
Keeping the key financing requirements of maritime sector and examples of sector specific financing institutions in India into consideration, a dedicated maritime sector focused institution – Maritime Development Fund – is proposed, the official said.
The growth of Indian-flag shipping tonnage has not kept pace with the growth of Indian trade needs. This has led to more than 93 per cent of Indian origin or destination international cargoes, and about 39 per cent of total Indian cargoes (including coastal and offshore operations) being carried on foreign-flagged ships, with an annual freight outgo of about US dollar 75 billion. The share of Indian flag ships in India’s EXIM trade has steadily decreased from 40.7 percent in 1987-88 to less than 7 percent.
Besides, the participation of Indian tonnage in global cross trades is negligible.
The number of ships under the Indian flag has grown over the years but the share of the Indian fleet as a percentage of the world fleet is hardly 1 percent compared to top maritime nations such as Greece, China and Singapore. “India should have a healthy merchant marine fleet and policies that will promote growth of Indian tonnage by adding more ships to the Indian flag which would further the economic and environmental interests of India,” the government official added.
