Centre to introduce Rs 2000 crore insurance support for shipbuilders
In a bid to allay apprehensions of shipbuilders on business sustainability, the government is likely to introduce a ?2,000-crore corpus to protect them from major contingencies in vessel orders, according to multiple government officials in the know.
The Ministry of Ports, Shipping and Waterways is in deliberations with the finance ministry and other stakeholders to set up a buyer's default insurance product through a public-sector agency backed by a government corpus. This will protect a shipbuilder from a vessel procurer backing out of an order midway or at the time of delivery, a senior official said.
"The shipbuilding sector in India is both capital intensive and nascent - one buyer's default can often threaten the survival of a shipyard. The currently proposed ?2,000 crore corpus will cover shipbuilders against that risk, given that no such insurance product currently exists in India," the official added.
The eventual goal of the Centre is to proliferate this product in the market and have private insurers step in as well, but for the foreseeable future, it will support the sector through this corpus, which is part of the deliberations of the larger shipbuilding cluster scheme announced by Finance Minister Nirmala Sitharaman in her Union budget speech in February.
The ?20,000 crore shipbuilding cluster programme aims to enable a shipbuilding ecosystem in India by fiscal and policy support measures. The policy would help state governments set up complete hubs and bring in globally-renowned shipbuilders to the Indian market.
According to officials, in established maritime economies such as South Korea, governments support shipbuilders against buyer default as it also ensures that premiums are low since the money comes from a state-sponsored corpus, allowing shipyards to access these products.
"In terms of current remedies for buyer default, shipyards often get caught up in technical quagmires on specifications with little protection besides being able to sell to a third-party. In India, that is difficult because there is not a large shipping market, moreover, for large, customised ships, it can become difficult to find a buyer at all," another government official said.
Queries sent to the shipping ministry on the proposed insurance product remained unanswered till the time of going to the press.
"We are currently in talks with multiple players to manage this corpus, including the National Credit Guarantee Trustee Company (NCGTC) and the ECGC (Export Credit Guarantee Corporation) from an export perspective. We should have clarity on it soon," the second official said.
The current state of the sector requires that these premiums be kept low and that will only be possible through a government corpus. The replenishment on the corpus would depend on the frequency of claims - the general global trend keeps these at around 5 per cent of orders, the official added.
Shipbuilders in the past have faced instances of vessels getting stranded at the yard, including India's largest engineering firm Larsen & Toubro, which had reportedly faced the situation with multiple offshore vessels before it decided to exit the commercial shipbuilding industry.
Experts believe the move will help both the shipbuilding and the ship financing and insurance ecosystem to grow. In infrastructure transactions, a larger capital quantum involvement makes buyer default insurance especially valuable, they said.
"Buyer default insurance is still uncommon in India, but several new insurance solutions have been introduced in the Indian transactions market e.g. warranties and indemnities insurance & associated enhancements. Government support would help in keeping insurance premiums low and increasing acceptance of the product in the market," said Vinay Ghai, investment banking partner for infrastructure at EY India.
According to insurance experts, the move may also help to catalyse foreign investments in the sector as assessment of risk and remedial measures becomes easier with a low-premium insurance product covering for vendor or buyer defaults.
Source: Business Sandard
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