Rs 4,000 Cr state aid to shipbuilding goes to bed as shipyards collapse Ship’s crew

A Rs 4,000 crore state aid budgeted by the government for local shipbuilders over a ten-year period from April 2016 is coming to an end after a series of shipyard collapses resulted in just Rs 241 crore or a paltry 6 percent of the total stock has been consumed so far, with three years left until the end of the program.

Financial support for Indian shipyards applies to shipbuilding contracts signed between April 1, 2016 and March 31, 2026.

Some 28 shipyards had registered under the scheme, nine of which have taken advantage and built 80 vessels approved for financial support of Rs 241 crore, Union Minister for Ports, Shipping and Waterways Sarbananda Sonowal, Rajya Sabha said in a letter answering a question on March 28.

The government disbursed Rs 58.03 crores in financial support to shipbuilding for FY21, 64.62 crores for FY22 and 58.04 crores for FY23 (until March 24, 2023), Sonowal added.

State-run Cochin Shipyard Ltd secured a large chunk of the subsidy approved so far (Rs 68.83 billion for the construction of 11 ships) and is the only state-run shipyard out of the nine on the list to have taken advantage of the scheme.

Goa-based Chowgule and Company Pvt Ltd has secured financial backing of Rs.55.13 crore
Construction of seven vessels while Mandovi Drydocks, also based in Goa, has been awarded Rs42.50 crores for the construction of 26 vessels.

The other shipyards that have received financial support are Gujarat-based Shoft Shipyard (19.13 crore for 15 vessels), West Bengal-based Titagarh Wagons (18.29 crore for 2 vessels), Goa-based Vijai Marine Services (Rs. 12.60 crore for 8 vessels), Sembmarine Kakinada Ltd (Rs. 11.23 crore for 2 vessels), Kolkata-based AC Roy & Company (Rs. 9.76 crore for 8 vessels) and the Goa-based Dempo Shipbuilding & Engineering Pvt Ltd (Rs. 3.98 million for a ship).

Larsen & Toubro, which operates a shipyard in Kattupalli near Chennai, has not benefited from the subsidy scheme because it only builds defense ships, which are not covered by the policy.

Local shipyards are eligible for a maximum government subsidy of Rs 40 crore to build a standard ship within three years from the contract date, under the norms set by the Ministry of Ports, Shipping and Waterways Implementing the Shipbuilding Financial Assistance Scheme which was announced in December Approved by the Union Cabinet in 2015.

The financial support for state and private shipbuilders is effective from April 1, 2016 for a period of ten years, with the amount being reduced by three percentage points every three years, starting at 20 per cent in the first three years, 17 per per cent for the next three years, 14 percent for the next three years, and 11 percent in the tenth year.

The amount of financial support for a vessel is based on the financial support rate applicable at the time of contracting and the contract price or reasonable price converted into rupees, whichever is lower.

The program was designed to promote the government’s Make in India program, to promote the local shipbuilding industry by creating a level playing field with foreign shipyards and to help India bolster its image as a shipbuilding nation.

But local shipyards have not been able to take advantage of the scheme, largely because some major shipbuilders such as Pipavav Shipyard, ABG Shipyard and Bharati Shipyard collapsed under a huge debt and had to be sold or liquidated under India’s bankruptcy law.

“The implementation of the program coincided with the collapse of large private shipyards such as ABG, Bharati and Pipavav,” said Syed Abdi, an independent shipbuilding consultant. “Rs 4,000 crore is a huge corpus, but there are no takers, there are hardly any shipyards. So what are you going to do?” he asked?

Some of the stressed shipyards have since been sold by the Insolvency and Bankruptcy Act (IBC), but they have been closed for many years so getting shipbuilding back on track now is a “big job”.

“Usually, when you start or restart, you can’t start shipbuilding immediately at first, it’s not feasible to start shipbuilding immediately per se. They need to start some repair work,” Abdi said.

This explains why no quantum leap in the take-up of the aid is likely to be expected in the remaining three years of the scheme.

The new owners of the stressed shipyards need to evaluate and finalize a business plan and pump in lots of money to get a return on their investments. Typically in the shipbuilding industry it takes around 5-6 years to break even.

“It’s a bottomless pit,” said one shipbuilding industry executive.

For example, he said one of the biggest problems most of these shipyards face is siltation. “They have to do dredging to then get the infrastructure running like the cranes and the machines that aren’t operational,” he said.

“No offense to the government; It’s chic to have documents like the Maritime Indian Vision 2030. But they need to put the money where it’s really useful for the new owners. For example, say how you can monetize inventory for the new owner of a shipyard. He’s pumping money in and wants to see the low-hanging fruit that can be monetized by the farm through either scrap sales or stock sales,” the executive explained.

In order to get the shipyard operational again, the new owners will need to obtain all shipbuilding licenses from the government, Indian Navy and Coast Guard warship building permits and insurance.

The state aid of Rs. 2.41 crore so far claimed has been used for the construction of small vehicles and ships.

None of the local shipyards have managed to snag some stunning large-scale contracts to build container ships, LNG, LPG, crude oil tankers and large ships that are being built around the world to run on alternative fuels such as ammonia and methanol.

However, Cochin Shipyard and Chowgule and Co have been an exception in this respect, achieving moderate success in winning some electric ship (green ship) orders from global fleet owners as well as local customers.

“These big orders are very hard to come by,” explained the aforementioned shipbuilding industry executive.

“The bottom line is that it is very difficult for a shipyard to individually build large cargo ships of a certain ship type because there is a learning curve. You invest a lot of money in the design, and if you build about six ships, that design cost can be spread across six ships. But you can’t build a new ship,” he explained.

The vast infrastructure needed to build large cargo ships is located in Cochin, Kattupalli (L&T), Pipavav, ABG and Bharati.

Pipavav is the only shipyard in India that can dock and repair oil rigs. It has the largest grave dock in India. The Cochin shipyard is currently constructing a similar ship, which will be ready next year.

In the absence of private shipyards with the capacity to build large ships, smaller ships that do not require large infrastructure are now mainly being built, the industry executive said.

“Everyone is beating the drums but there is only hollow sound,” said a second shipbuilding expert, bemoaning the lack of large private shipyards capable of building large cargo ships.

“But when new owners come in, there is light at the end of the tunnel. There is a recovery strategy,” he said.

The government and new shipyard owners should sit down and discuss ways to adjust the policy to align with the Maritime India Vision 2030. he explained.

“Whatever is feasible and within its limits, the government should see how far it can go to help the new owners. That’s the key,” he added.

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