Bengaluru: Indian shipyards must have a positive net worth if they are to become eligible for exercising a so-called right of first refusal to build/repair ships for government departments/agencies including state-run firms, according to new guidelines issued by the shipping ministry on Thursday.
The shipbuilding policy approved by the cabinet grants a right of first refusal to Indian shipyards on government purchases and ship repairs, whereby local shipbuilders can take up state-funded contracts/works by matching the lowest price offered by overseas entities in a public auction.
The shipyard should have positive net worth during the immediate preceding financial year. In case an Indian shipyard does not have a positive net worth as required during the immediate preceding financial year, it should provide a so-called comfort letter from scheduled banks/ reputed lending institutions indicating to provide necessary financial support (at least 60% of the value of the contract for shipbuilding and 50% of the value of the contract for ship repairs) to execute the project, the ministry wrote in the guidelines issued to implement the financial assistance scheme cleared by the cabinet in December. The scheme took effect from 1 April.
This will put pressure on debt-laden yards that are undergoing financial restructuring, according to a Mumbai-based shipbuilding consultant.
The financial assistance to shipbuilders – both state-owned and private – will be valid for a 10-year period beginning 1 April 2016, scaling down the quantum by three percentage points every three years, starting with 20% during the first three years, 17% for the next three years, 14% for the next three years and 11% in the 10th year.
“From 2025 onwards (when the financial assistance scheme ends), only Indian-built vessels shall be procured by such departments and agencies for governmental purposes or for own purposes. Such departments and agencies have to undertake bulk tendering for their entire vessel related requirements with deliveries starting from 2017-2018. This is in line with international practice where many countries, in order to provide dedicated order-book support to domestic shipyards, place their ship-acquisition and repair requirements on their (local) shipyards,” the shipping ministry said in a statement. Mint reported this plan on 3 March.
Prior experience in building or repairing a specific type or size of vessel will not be a qualifying criteria for determining the eligibility of Indian shipyards. Technical qualification of local shipbuilders will be based on the infrastructure availability and capability of the shipyards to execute the shipbuilding contract or ship repairs.
Indian shipyards will be qualified based on a technical qualification template drafted by the government.
However, Indian shipyards not having experience in building specialized ships should enter into suitable tie up with an experienced shipyard or designer as per the terms of the tender.
Local shipbuilders have been struggling to get orders for constructing merchant ships since the global financial crisis of 2008.
Indian shipyards have been outbid by Chinese and Korean shipyards due to cost differentials. For instance, domestic shipyards pay 13-14% interest on long term and working capital loans as compared to around 4-6% in countries such as China and South Korea.
“It’s a big boost for Indian ship building industry. The ship requirements of the Indian government is huge. This covers the requirements of the Shipping Corp. of India Ltd, Gail Ltd, Steel Authority of India Ltd and defence PSUs,” said ABG Shipyard Ltd chief financial officer Dhananjay Datar.
The move comes at a time when the Narendra Modi led government is trying to promote the manufacturing sector, and increase the contribution of manufacturing to 25% of the gross domestic product or GDP.
As a step towards supporting Indian shipbuilding and ship-repair industry, the cabinet had, on 9 December 2015, approved the criteria for evaluating and awarding tenders for shipbuilding and ship repair works floated by government departments or agencies including PSUs.