Privatizing a strategic asset like SCI makes little sense
The latest delay in the privatization of India’s sole state-owned merchant shipping company, the Shipping Corporation of India (SCI), offers a chance for the Centre to rethink the privatization of this strategically critical national asset. While there is a good case for the exit of government from business in general and the privatization of most state-owned enterprises in particular, SCI has to be viewed through a different lens – that of national security. Nothing underscores this more than the travails faced by Russia in attempting to circumvent Western sanctions and keeping its international trade going.
Logistics operations have come to a near halt, with major operators either stopping services or severely restricting them. Estimates put the reduction in freight cargo transported by road from Russia at more than a million tonnes per quarter. At Frankfurt, Europe’s busiest air cargo hub, the 20 flights a week operated by Russian heavy cargo planes have stopped.
But by far the biggest impact has been felt by shipping, with the major Western container and general cargo suppliers having stopped services to Russia. By this time, this should have led to a situation of nothing moving in or out of Russia. That it hasn’t is because of two factors: One, Russia has a fairly strong merchant fleet of its own; and two, China, the world’s fastest-growing merchant shipping power over the past decade, has stepped into the breach to bail Russia out.
The fact that Russia has a strong local merchant fleet has helped. According to UNCTAD data, the Russian Federation had 1,786 ships, accounting for about 1.3% of the world’s marine cargo capacity. However, before the war broke out, only 322 of these were ‘foreign flagged’ – that is, owned by Russian entities but operated under the registry of other countries.
Post sanctions, this has forced a record number of “flag switches” by Russian ships. According to some industry monitoring websites, flag switches have entered double digits since March – more than thrice the long-term monthly average. Apart from this, Russian ships have been forced to switch off identification and location transmitters, as well painting over vessel names and IMO numbers on the hull to try and prevent identification as Russian.
While these are violations of international maritime laws, as sanctions specifically bar other activities like ship-to-ship transfers of cargo, the fact is that these actions have helped to keep Russia’s economy from coming to a complete halt, despite the fact that 90% of the world’s trade is carried on the sea. These have happened only because Russia not only has owned vessels but has the support of China in carrying out its trade by sea. China’s merchant fleet has more than doubled in size over the past decade.
With 7,318 ships under the Chinese flag in 2021 and a further 1,764 registered in Hong Kong, China is de facto the world’s biggest merchant marine power, with a total tonnage capacity of 348 million DWT, only marginally behind world leader Greece’s 373 million DWT, but most of Greece’s fleet is foreign-owned, operating under its flag of convenience. In the case of a conflict – either involving India directly or in the Indian Ocean region – will leave India with few such options. While 98% of India’s trade by volume and 68% of trade by value is carried by sea, most of this is money paid to foreign operators – India ranks 19th in merchant fleet strength in the world rankings, with about 1% of global capacity in tonnage but these numbers hide more than they reveal.
More than a third of the total (and a much higher percentage in critical cargo areas like crude, LPG and natural gas carriage) is under foreign flags. The existing Indian fleet is also aging, with the average age increasing from 15 years in 1999 to 19.71 years as of October 1, 2019, according to the Economic Survey for 2019-20, with more than half the fleet over 16 years old. This is where SCI becomes critical to India’s maritime security interests, as well as central to its ‘blue economy’ policy.
With 59 vessels totalling 531,1211 DWT, it is by far India’s largest merchant cargo carrier. It also owns critical infrastructure like very large crude carriers, petroleum product and gas carriers. What’s more, SCI mans and operates offshore supply vessels for ONGC, maritime survey vessels, deep-sea exploration vessels and even dredgers that keep our ports operations.
A privatized SCI may pull out of these niche markets. It is not as if privatizing SCI will allow unfettered growth of the shipping sector in India. The fact that the two largest private Indian shippers – Essar and Great Eastern – do not have a combined fleet strength that matches SCI.
Despite policy changes that give preference to Indian-owned ships for Indian freight, the fact remains that constrained shipbuilding capacity – China, South Korea and Japan together account for 85% of the world’s shipbuilding market – and lack of financing options have meant that even Indian shipping companies have increasingly opted for foreign flag operations. Until such time as India can sort out its long-term structural issues related to shipping – building shipyard capacity and developing domestic financing and insurance capacity – privatizing a strategic asset like SCI makes little sense.
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