Private sector participation in Indian port sector has been on the increase during the past one decade with the Government of India (GoI) and a few state governments taking several initiatives to encourage private investments in port development. Notwithstanding the initiatives, the private players continue to face several challenges.
 As against the total investment of Rs. 374.04 billion envisaged by the private sector under NMDP until March 31, 2012, actual investment till March 31, 2009 amounted to just Rs. 31.42 billion. Some of the key reasons for this less-than-satisfactory response are : a) Tariff setting process
The Tariff Authority for Major Ports (TAMP) was constituted in April 1997 as an independent statutory authority with powers to determine the tariff to be charged by Port Trusts as well as by private operators of port facilities. Since its inception, TAMP has come out with three sets of guidelines in 1998, 2005 and 2008. The first set of guidelines was the basis for computing port tariff during the period 1998-2005, under which a normative cost plus assured rate of return [Return on Equity (RoE) of 20%] was allowed. The guidelines were refined in 2005, and became applicable for a five-year period. Under these guidelines the assured rate of return was based on a return on capital employed (RoCE) of 16% (pre-tax, currently) as against the RoE basis of calculation used in the 1998 guidelines. Capital employed has been defined as the sum of Net Fixed Assets and Normative Working Capital, with norms specified for depreciation and various working capital parameters. Clarity also emerged on the issue of royalty/revenue share as a pass-through item in the 2005 guidelines. According to the 2005 guidelines, for projects bid before July 2003, royalty quoted by the next highest bidder was allowed as a pass-through cost, with the balance to be borne by the operator from the operating surplus. For projects bid after July 2003, royalty was not a pass-through item, which means the operator was supposed to make the entire royalty from the operating surplus. Some of the concerns relating to the TAMP 2005 guidelines are as follows: While bidders estimate tariff on the basis of the guidelines and quote a revenue share, the actual tariff could be lower because of several disallowances of expenditure. Allowance of permissible "operating costs" and "capital costs" is ad hoc in nature, besides the approval process being time consuming. The guidelines mop up 50% of the efficiency gains in the subsequent review period (tariffs are reviewed every three years).  There is lack of clarity on what would be the "standard" or "installed" capacity of the terminal, one that would form the basis for the determination of tariff by the application of normative capacity utilisation. As the return is computed on a depreciated asset base, tariffs will be downward sloping and could reach near zero levels during the later years of the project. Besides impacting all private operators, this would seriously affect projects that have committed certain "minimum guaranteed cargo" for the payment of royalty/revenue share in their bids. The latter can impact the developers in years when the actual cargo is lower than the guaranteed cargo, with the impact arising on two counts, viz. lower revenues, and disproportionately high outflow on account of revenue share. Given these concerns, various project developers have litigated against TAMP 2005 when tariffs have been revised downward with the passage of time. Moreover, because of these uncertainties, some projects have also faced difficulties in achieving financial closure.  To address such concerns, TAMP came up with its 2008 guidelines, which are applicable only for new PPP projects, even while the existing developers operate under the 2005 guidelines. Under these 2008 guidelines, TAMP provides an upfront tariff cap for bulk/container terminal, using broad norms, specified on the basis of capital costs, operating costs, and optimum terminal capacity, for a period of five years. The tariff will be escalated year on year, with a 60% linkage to Wholesale Price Index (WPI) inflation. Based on this tariff, bidders are supposed to quote royalty/revenue share (to the Major Ports), which would form the basis for selection, among other factors. While the revenue share quoted is not a pass-through item even under the 2008 guidelines: the key positives compared to the 2005 guidelines are as follows: Tariff will be upward sloping because of the indexation to inflation, and will not decline with the passage of time. There is less uncertainty on tariff, which makes it easier for bidders to quote a particular level of revenue share. However the positives notwithstanding, project developers could be facing lower returns than promised if the actual capital expenditure turns to be higher than that estimated by TAMP (using the 2008 norms) and used by it for upfront tariff setting. There is a provision in the 2008 guidelines to review the tariff every five years, so as to adjust for any extraordinary developments not foreseen initially. It remains to be seen if TAMP will revise the tariff upwards if project costs were to escalate. Unlike the Major Ports, private ports do not come under the purview of TAMP and hence have the freedom to fix market-determined port charges. As a result, some private ports have been able to charge higher rates than a nearby Major Port. Globally, ports in developed countries have the freedom to fix tariff on the basis of what the market can absorb, as port charges would constitute hardly 10% of the entire logistics value chain costs for any customer. The other charges such as oceanic freight and inland freight (rail and road) are not subject to price controls. In order to strengthen TAMP, the GoI has recently proposed setting up of a Major Port Regulatory Authority (MPRA). As a step in this direction, a new legislation, that is the Major Port Regulatory Authority Act, 2009, has been mooted. If this legislation, which is in the consultative phase now, is passed by Parliament, MPRA will replace TAMP and will have the regulatory powers, inter alia, to specify and monitor performance standards and levy penalty on terminal operators. This will also remove a key drawback associated with TAMP, which is that TAMP, unlike other domestic regulators [such as Telecom Regulatory Authority of India (TRAI), Central Electricity Regulatory Commission (CERC) and Petroleum and Natural Gas Regulatory Board (PNGRB)], is not vested with the powers to set and enforce performance standards and other measures for protection of user interests. b) Bidding process and MCA Private participation in port projects in India was initially facilitated through the guidelines issued in 1996 by the Ministry of Surface Transport, GoI. These guidelines identified the areas of participation for the private sector. However, barring a few players such as P&O (subsequently acquired by DP World) and PSA, not many developers came forward during the period 1996-2000 because of the several drawbacks seen in the BOT framework. To address the concerns of the prospective bidders, the GoI unveiled its Model Bidding Documents in 2000, including a Model Licence Agreement. The GoI further refined the concession agreement and unveiled a new Model Concession Agreement (MCA) in 2008, providing for upfront tariff setting. The process of selection under PPP involves two stages: in the first stage, a Request for Proposal (RFP) by the port concerned is made on the prospective bidders, and six bidders are shortlisted on the basis of the qualification criteria specified; in the second stage, a Request for Qualification (RFQ) is made by the shortlisted bidders, wherein the party quoting the highest revenue share gets the rights to develop the berth/terminal for a period of 30 years. A contentious issue in the process of selection has been the qualification criteria adopted; these have led to disqualification of even some of the leading port terminal developers in the world at the pre-qualification stage. Consequently, such disqualified bidders have sought legal recourse against the bidding process adopted, thereby delaying project award. The selection process has also been long drawn, with the ports concerned being required to obtain approval from the PPP Appraisal Committee (PPP AC), which is an Inter-Ministerial Committee chaired by the Secretary, Finance Ministry, on bidder selection. More importantly, the need for PPP AC itself has been questioned by the bidders, given that the project scope and selection criteria have been pre-identified by the shipping ministry already. Besides, unlike road projects, where positive grant is a possibility in some projects involving GoI funds, for NMDP projects the entire funding is coming from the private sector. The new MCA also has its share of drawbacks, given that it is a document that is common for all kinds of terminals such as dry bulk, liquid bulk and container, each of which has certain unique characteristics. Clarifications routinely sought by bidders on these unique aspects also delay the selection process further.  (c) Delays in land acquisition In general, greenfield ports require large tracts of land, the acquisition of which is fraught with delays because of the local sensitivities involved. Although the respective State Governments have played a catalytic role in facilitating acquisition, local factors have often impacted the process. Such delays impinge on the pace of port construction, besides connectivity projects. (d) High market risks for greenfield ports Port development is a highly capital intensive process, and consequently, the debt servicing burden is quite high after the initial moratorium period. Thus it is essential for traffic scale-up to happen quickly for a company to be able to meet its debt servicing obligations. ICRA has however observed that scale-up takes time, since the market risks associated with the projects are quite high. Some of the reasons for the same are: - High susceptibility to economic cycles: The total cargo traffic of all ports in India increased at a compounded annual growth rate (CAGR) of 11% during the period 2004-2008, in line with the buoyant GDP growth during this period. However, the growth rate fell sharply to around 2% in 2008-09 (Refer Charts 1 and 2) over the previous fiscal because of the global economic slowdown, especially in the second half (H2) of 2008-09. However, ports focused more on petroleum, oil and lubricants (POL) cargo, such as Kandla, were relatively unaffected as refinery capacity utilisation remained high. - Absence of anchor customers: As the process of weaning customers away from an existing and nearby port may be a long drawn affair, some greenfield ports have adopted the model of having a few anchor customers, cargo volumes from whom are assured through long-term contracts. Although it would mean sacrificing margins, as anchor customers invariably ask for finer pricing citing their long-term commitment, the model ensures some stability in cash flows. However, barring a few, the new ports have not been able to rope in anchor customers. - Delay in port-road-rail connectivity projects: ICRA notes that port tariffs are higher for greenfield ports than for competing Major Ports because of the higher capital costs involved in the new ones. However, the new ports justify the higher tariff by pointing to the savings accruing to port users on the integrated logistics cost, which comprises oceanic freight, port charges and inland freight. Still, delays in port-rail-road connectivity projects invariably impact the demand prospects as prospective customers may not be incentivised enough to use a new port despite the other advantages (e.g. ability to handle large vessels and high level of mechanisation). - ICRA also notes that the mere availability of a railway line to a port is not enough to attract customers if rail wagons are not available in adequate numbers. In several new ports, because of the imbalance in import and export cargo, rail wagons are not available to the extent that the end-users require. Considering the continuing weakness in the global economy, ICRA expects cargo growth for domestic ports to remain muted in 2009-10. The key commodities that suffered slowdown in 2008-09, such as iron ore, coking coal and metallurgical coke, are continuing to face demand-side pressures. Besides, prospects for container trade, despite the brief recovery in the current fiscal, remain weak because of the slowdown in several end-user sectors. However these concerns notwithstanding, ICRA believes some ports are better positioned to withstand the overall trend of muted growth because of their cargo mix. Specifically, ports focused more on commodities that are largely domestic-consumption driven (e.g. crude oil, FRM, finished fertilizers, edible oil, thermal coal) could grow at a healthy pace in 2009-10. (e) High revenue share being quoted for BOT projects ICRA has observed a steadily rising trend in the royalty/revenue share being quoted by private developers for the new port terminal projects at Major Ports under the BOT scheme. While the revenue share was in the region of 10-20% in the initial years of privatisation, the same has breached 50% in one of the terminal projects awarded in the recent past. Such a high level of revenue share would significantly reduce the financial flexibility available to the terminal operator to withstand any slowdown in cargo, especially given that revenue share is not a pass-through item under the TAMP tariff guidelines for projects awarded post-July 2003. ICRA also observes that in general the revenue share quoted by project developers for Non-Major/private ports is lower than that quoted for terminal projects within Major Ports, as the commercial risks and capital intensity associated with a greenfield port would be far higher than the same for a terminal under a BOT scheme at a Major Port. Thus in instances where these two players viz. a terminal under BOT in a Major Port and a private port, compete for the same hinterland cargo, the private port will have a far greater pricing advantage. (f) Availability of long-tenure project loans As the gestation period associated with a greenfield port is long, project developers look for long-tenure loans often extending to 15 years. However, barring a few, the appetite of Indian lenders for long-term loans is low. The developers have also not been in a position to tap the corporate bond market because of lack of adequate demand for low rated papers. Hence, some developers are forced to settle for slightly shorter maturity project loans, thereby exposing themselves to refinancing risk. The recent policy initiative of "takeout financing" by India Infrastructure Finance Company Limited (IIFCL) should however partly alleviate this risk. (Excerpted from ICAR report ‘Challenges in Private Sector Participation in Port Projects” |
