State-owned shipping company planned: strategic boon or another SOE burden

The Department of Transport (DOT) has released a pre-draft South African Shipping Company Bill and invited interested parties to take part in virtual stakeholders’ consultations in KZN, the Western Cap and the Eastern Cape on 28, 29 and 30 November respectively. The Bill seeks to establish a state-owned shipping company to compete in one of the purest market-driven industries, being international shipping. This is pursuant to government’s shipping and transport policy documents calling for South African flagged ships. Whether this SOE will arrive, thrive in the ruthless shipping environment, or become another burden on the taxpayer remains to be seen. The fact that the private sector has failed, with the exception of two bulk carriers, to move to the South African flag, suggests that, without fiscal support, this SOE will fail.

The stated rationale for this company is that the majority of essential imports and exports are reliant on foreign shipping companies and they might not shield South Africa from supply chain disruption, particularly during times of natural disaster or international conflict. In addition, the DOT identifies South Africa as the only country in BRICS not to have its own ships. The latest Comprehensive Maritime Transport Policy calls for a transformed and growing maritime transport sector. That policy provides that the DOT should take steps to establish a national shipping carrier as a strategic pillar in the revival of the maritime transport industry. The policy documents ignore the economic issues and the emphasis is on national strategic needs mixed with a bit of pride.

The rationale for, objectives of, and a summary of the contents of the pre-draft bill can be found from page 28 onwards in the link.

In brief, the bill proposes the establishment of a shipping company wholly owned by the state, which will own and operate a “strategic fleet” consisting of bunker barges, container vessels, bulk carriers, oil and chemical tankers, and coastal vessels.

Section 3 of the bill sets out the objects of the company being: participating in the carriage of exports and imports as the preferred national shipping carrier; owning and managing a strategic fleet of vessels; owning and operating clearing and forwarding, stevedoring, warehousing and other logistics companies and infrastructure; and engaging in services in relation to all the strategic vessels. The intention is to establish a full service shipping and logistics company wholly owned by the state and reporting to the Minister and Parliament. In doing so it will compete directly with numerous private entities servicing the same logistics markets.

Section 5 of the Bill provides that the company will be financed by the Industrial Development Fund for the acquisition of the strategic fleet and any shortfall in operating revenue will be provided by money appropriated by Parliament.

Section 10 of the Act requires the company to engage in a commercial shipping business in order to achieve the objectives set out above. In doing so, the company must be: globally competitive; implement a high standard of efficient shipping services; maintain a professional and skilled workforce; maximise the company’s economic use of ships; keep a fleet of vessels that are running efficiently, on time, and within budget.

The Board of 7 to 13 members appointed by the Minister must be appointed on the basis of their specialised knowledge and experience in the field of shipping trade, corporate management, maritime transport, clearing and forwarding, commerce, banking or legal matters.

Chapter 4 of the Act deals with the appointment of a CEO and staff, all of whom must be experienced in ship management.

The balance of the bill sets out the corporate management issues relating to reporting, guarantees, winding up and the drafting of regulations.

On the face of it then the bill envisages the establishment of a new South African shipping company to run a national fleet. The only difference between this shipping company and other South African shipping companies is that it will be a state-owned entity ultimately funded by the taxpayer. Although the aims, functions and structure describe a properly competitive entity, the reality is that this government has failed to run a single profitably large SOE. The fact that the private ship-owning companies have all removed their ships from the South African flag and ignored DOT’s entreaties to return is because South African flagged ships are less profitable than others. This is due, in the main, to our employment legislation.

This company will have to compete with private sector operators who already service South Africa’s shipping transport needs. We have seen a consolidation of the big shipping lines over the last decade as market conditions and global competition mean that economies of scale are necessary to run a profitable shipping company.

The bill itself does not provide any economic support to the company other than the financial backing of the taxpayers via the Government. Government has mentioned in the policy documents and presentations that it will consider means to encourage South African imports and exports to be carried on South African flagged ships. Compelling exporters to carry a certain percentage of their products on South African flagged ships has been mooted. Whether this would get past the Competition Commission and trade laws is not clear. If however the effect is to allow an otherwise unprofitable state-owned shipping company to run without being a burden on the taxpayer, it will increase the price of South African commodities. Depending on the extent of that increase, buyers of our commodities may then look elsewhere.

Insofar as the domestic carriage of goods is concerned, Government has raised the possibility of introducing cabotage legislation, which would effectively require all cargo carried between South African ports to be carried on South African flagged ships. The private sector has pointed out that there is very little coastwise cargo other than fuel when the Durban refinery still worked, sugar from Durban, and a few thousand containers a year that would otherwise go by road or rail. It may be that the planned establishment of giant container hubs by the large shipping lines at Gqeberha and/or Durban would generate large volumes of containers for feeder vessels to the other South African ports. However, if carriers such as Maersk, MSC and CMA CGM are told that they can establish giant container hubs in South Africa but must then use South African flagged feeder ships owned by the SOE shipping company, they may well decide to move those hubs to neighbouring countries.

The fact that it is pre-draft bill means that we are a long way from the possibility of seeing state-owned ships proudly carrying the South African flag, but everybody engaged in ship operating and chartering, warehousing, forwarding and logistics may be affected by this Bill and are urged to attend the public consultations and make their views known. It may be that the new approach by the Minister of Finance to limit SOE bailouts to those with strategic importance means that this company will be left to fend for itself in the viciously competitive international shipping arena. If that is the case, this company will find it challenging to survive when our legacy of private South African shipping companies have elected to operate their vessels under different flags and from different countries.