Shipbuilding

The origins of this particular write up emanate from a chance encounter with a naval officer, and a gentleman, who in his career had an opportunity to experience commercial as well as naval maritime at close quarters. Initially, one must confess, his passionate discourse on the benefits of setting up shipbuilding industry at Gwadar struggled to induce interest, most likely due to the decades of brainwashing that the nation has been subjected to over the fallout of the Pakistan National Shipping Corporation and the ship-breaking industry. However, things took a turn, when it was mentioned that the three leading shipbuilders of the world are Korea, China and Japan and that China is strategizing to be the industry leader by 2015.
Those, having even a wee bit interest in world economics, should find it curious that three of the leading economies of the world are also the top shipbuilders of the world, is that a coincidental correlation or is there causation?
Having always believed that the word "coincidence" was conspiratorially included in the English dictionary to provide an excuse for inefficient or immoral conduct, the aforestated query stuck to the cerebellum, eventually resulting in long searches on Google. With all due credit and respect for the originators of data on shipbuilding on the internet, and with due apology on the inability to give specific credits primarily because of a haphazard methodology adopted, the resultant data was an eye opener as well as a catalyst for deepening the mystery.
While eventually it appeared logical, but the fact that on the eve of World War I, Britain, Germany and the US virtually held a monopoly over the shipbuilding market, was news. Britain alone held 60 percent of the market for more than two decades leading up to 1914, which raises the question whether the industrial revolution was the cause of leadership in this industry or vice versa or is all this only a coincidence! Was shipbuilding instrumental in USA winning World War II?
After the World War II, Japan, at a policy level, choose to pursue shipbuilding as a critical industry and by 1960 captured 50 percent of the market, and continued to hold the top slot well into the 1990s; again a coincidence? Those who recall the 70s and 80s all the way up to 1992, the beginning of Japan's lost decade, will recall that almost everything in the stores was made in Japan.
Korea entered the shipbuilding industry in 1970, however, massive investment in the industry was only committed by their shipbuilders in 1990, which seemingly, and coincidentally, enabled them to wrest the first position in the industry. Finally, China decided that shipbuilding would be its hub industry and by 2006 had become the second largest shipbuilder, pushing Japan to third position. Arguably, the downturn in the industry during the 2008 global recession may have hampered China's advent to be number 1, which nonetheless is now envisaged in 2015. It took China 5 years to become the third largest shipbuilding nation. It continues to categorise shipbuilding as a key initiative in its current five-year plan.
And the story does not end at this point. Turkey, since the 1990 is recognised as a shipbuilder and its export earnings from the industry stood at USD one billion in 2010, during the recession. The Turkish government acknowledges that the industry has tremendous growth potential with significant contribution to the economy. The industry employs a large number of workers and facilitates industrial capacity in general, nurturing all kinds of downstream manufacturing industry. Accordingly, the government provides all kinds of incentives and protectionism to the industry which include exemption from duties, low or no taxation, cheap financing and what not.
Imagine compared to all that, Pakistani policymakers, to improve tax collection, handed the business of ship-breaking at Gadani to India and Bangladesh. Apparently, much recently, sense prevailed and the industry is again picking up. At this stage, a point to ponder, if Pakistan has one of the most strategically located deep sea ports in the world, should it not be a coincidence that the country be a leading player in shipbuilding rather than making all attempts to losing its position in ship breaking; and as succinctly pointed out building is in an entirely different class than breaking.
Ponder further, with the sixth largest population in the world, and consequent extensive trade activity why was PNSC not protected and allowed to go under? Why could importers not be required to use PNSC mandatorily? Who is responsible for that debacle?
The brainwashing that public corporations are corrupt and inefficient is systematically resulting in the nation handing its advantages on a platter to other nations. If privatisation is so great, why Saudi Arabia, in fact all oil nations, don't privatise their oil reserves? If privatisation is so good why does China not privatise its key industries and hand them to Russians and Indians for efficient management? If privatisation is so great Emirates should be privatised before PIA! And if free markets are the best option, why do sovereign wealth funds exist and why do governments always end up nationalising banks during the global financial crises?
For the ill-informed, banking crises are common occurrences across the world for a long, long time with governments assuming control as the only solution. There is nothing new about sub-prime or euro debt. Continuing with shipbuilding, even Vietnam jumped into the foray and the government has termed the industry as priority. Apparently they entered the race about a decade ago and already hold the fifth position, based on orderbook, whatever that means. Surprise, surprise, another coincidence, for the past decade the country enjoyed impressive economic growth (5 percent to 9 percent).
Note that shares handed to private sector while the industry continues to enjoy special privileges, referred in general parlance as monopoly rent, is not privatisation! Brazil, Philippines and India are the recent, within a five-year horizon, entrants to this industry, take a guess why? All have ports and cheap labour, the key ingredient for the industry, which by the way Pakistan is abundantly blessed with! What a coincidence!
The critiques and opposing lobbies will immediately point to the cyclical nature of the industry. True, but with the population of the world moving fast towards 9 billion, commodity trade and prices are broadly expected to always rise. And what does the country lose? The port and labour already exists and the initial outlay should not exceed 20 percent of the development budget or 1/3rd of circular debt. The best option is to enter into a JV with a foreign shipbuilder and provide him as much incentives as needed rather than contracting a technical study and wasting time. Employment and fostering of downstream industry are the short-term objectives. Apparently, the project can be up and running in two to three years and perhaps in five years who knows.
Referring to the discussion at the beginning, apparently, the proposal has been under consideration for a few years now, and for some unfathomable reason the decision-makers continue to procrastinate. If the government plans to spend its way out of the economic recession, Keynesian style, then perhaps shipbuilding should have first right of refusal over such spending. Admittedly, railways have a key claim as well, but cargo can only be hauled inland after it lands at the port! If Korea, China, Vietnam, Brazil and India can categorise shipbuilding as a critical industry, why can't Pakistan? Is that a coincidence too!
(The writer is a chartered accountant based in Islamabad)