Investing in ships doesn’t guarantee good returns

Not all maritime nations, Kenya included, may invest in ships because of economic reasons. They may not see shipping in the context of business and may decide to invest in shipping and own a national fleet as an arm of nationalistic and expansionistic regime.

Others may even do so for prestigious purposes. Whether this is the right thing to do or not is not the argument intended for in this commentary. A national shipping line must employ professionally qualified personnel, not because they are politically correct.

Remember this has been the failure of many maritime developing nations, particularly in Africa when it comes to the management of merchant vessels.

Sample this; at independence, Ghana had a fleet of 12 ocean vessels. Today they have two only. What went wrong? Your guess is as good as mine.

The government can assist the shipping industry by granting a direct cash subsidy for ships and that nations owning ships can easily eliminate the use of other nations’ ships which are considered expensive and thus save on foreign exchange. It has also been said that a national shipping line would attract foreign exchange and add value to national economy.

The argument further points out those operating costs for state owned vehicles would be in local currency and thus eliminate the drain on foreign reserves.

It also recommends that for more benefits to be realized from such investment, the government could restrict shipment of inferior goods to those that would ensure a good income for local shipping companies.

In shipping this is termed as discrimination, an outdated concept in the shipping world where competition for better services is the norm for today.

Indeed the investment in ship buying would attract foreign exchange when entered into trade but such investment cannot be economically viable if there would be no improvement in balance of payments.

There is therefore need to define the effect of investing in ships. The objectives for doing so must be correct and clear. On many occasions justifications would be a combination of economic social and political gains.

Looking at freight, if a nation has a significant part of its foreign trade carried in ships owned by foreign nations, and freight is paid by citizens in either direction, the substitution of foreign vessels by national carriers must mean saving of foreign exchange.

Foreign ships

It is also true that if freight earned by foreign ships is being paid by citizens of foreign countries, the earnings of the national ships must mean new foreign exchange earning.

Suppose the substitution takes place in a cross trade, then presumably, the second point here would apply to the whole of the freight. Of course, precisely the same argument would apply to passenger fares, mail money and any other gross earnings.

The net result is that the whole revenue, in both directions, and whether in cross trade or not, becomes a gain to the balance of payments, not withstanding the distinction between shipment made on FOB or CIF.

What is relevant here is freight currently by the foreign ships is what needs to be shifted; but when countries are encouraged to protect their shipping industry, state owned or privately owned, there would be no gain to the balance of payment.

Why is this so? If investment in shipping is accompanied by protection, e.g. flag discrimination which result to higher freight rate in the protected market, it is no longer the earnings of the national flagships which represent a gain to the balance of payment, it is the earnings of foreign ships which could replace them without protection and at lower freight rates.

There is no reason why monopolistic situation should be created or altered simply because the goods move under a different flag. For imports, it is the same.

The gains cased by flag discrimination in the shipping account of balance of payment will be precisely offset by losses in the visible trade account.

The second argument is based on money that the national carrier would spend away from home i.e. “spending abroad”. Unless the national carrier is engaged in purely coastal trade, the national flag ships will inevitably have expenses outside their own country.

Again unless the nation is an oil producer, they will have to purchase some fuel abroad , and whatever the case, they will incur port dues, agent’s commissions, cargo handling costs and various other items the largest of which will be insurance, repairs and the personal spending of the crew.

Third point

The third point to be considered is the money that would be spent domestically i.e. at home. The national shipping lines need to be fully occupied in cross trades. Otherwise they will spend large sums on their own home territory.

All items of expenditure on current account, goods and services which do not change the location of the expenditure upon the substitution of a national flag ship for a foreign one must appear either under spending abroad or at home. In fact it does not greatly matter since both must deducted from the foreign exchange earned or saved.

The fourth and the last point of argument is on “capital costs of ships” an element which may affect the balance of payment. If the nation invests by importing the ships, directly purchasing from abroad, the direct result in such a substitution is a large outflow of foreign exchange.

Obviously, this would be the last thing one would like to take place. Building ships at home will only be possible if there is shipbuilding industry capable of carrying out the task to the world acceptable standards.

However even where this is possible, some components such as winches, windlasses, radios, radar equipment, generators, steering gear, navigational aid and even the main engine. Other than that, it may also be necessary to import specialised technicians, with salaries and expatriation expenses payable in foreign exchange, to add to this, balance of payment are likely to remain constant.

The other alternative is to obtain second hand ships. The operating life of such ships would be shorter, the repair costs higher and the initial costs correspondingly less. In conclusion, arising from the foregoing, the most logical way to go is to decide on the method that will improve the balance of payment in the long term.
Credit: Ismail Said Mboya

Source: Business Daily