Minor ports have emerged as more attractive to private investors than the major ones, notably after the controversial TAMP revised tariff as PPP projects at major ports are marred by litigations, delays and disputes. Siddharth Paradkar and Anirudh Reddy recommend a change in the revenue-sharing model.
The Indian coastline is dotted by 13 major (i.e., central government-owned) ports and about 180 minor (i.e., privately owned or owned by states) ports, accounting for nearly 90 per cent (by volume) of India's international trade. Kandla, JNPT and Mumbai ports handled the maximum traffic in FY13 among major ports. Gujarat has the maximum capacity in minor ports, followed by Andhra Pradesh and Maharashtra. In FY13, significant capacity additions to non-major ports included Mundra, Krishnapatnam and Katupalli.
A feature of the port traffic growth over the past few years reveals the growing prominence of minor ports. While the traffic at major ports has declined from around 570 million tonne (mt) in FY11 to around 540 mt in FY13, traffic at minor ports has increased from 315 mt in FY11 to around 365 mt in FY13 (Figure 1).
A cursory glance at the performance indicators of major ports reveals the laggard nature of Indian ports in comparison with global peers (Figure 2).
Private participation was sought as a remedy to bring in required investments and managerial efficiency. Out of 758 projects undertaken under public-private partnership (PPP), 62 projects belong to the ports sector (in various stages of implementation). Success of PPP in roads sector was sought to be replicated in ports sector, but the experience over the past few years has been disappointing. Investments in port sector in the 11th Five Year Plan faced a huge shortfall of more than 50 per cent in the final outlay. A majority of this investment was envisaged by private players. In FY12, only three (of target 23 projects) were awarded contracts. Uncertain macro-economic climate has added to the slowdown in PPP projects. Major ports have been steadily ceding ground to minor ports in their appeal for private sector investment.
PPP in port sector is primarily in the operations and management of ports, construction of container terminals, shipping yard and bulk ports. For minor ports, the respective state governments have allowed lease of the entire greenfield site to private developer for construction and operation of ports. A 100 per cent foreign direct investment (FDI) under automatic route is permitted for port projects.
The predominant model followed in PPP port projects is the 'revenue share', where the bidder who commits to share the highest proportion of revenue with the Port Trust is awarded the project. The last few years have witnessed entry of foreign players like DP World, Maersk and Port of Singapore Authority in operating terminals in major and minor ports. Private players like Adani have been instrumental in developing minor ports like Mundra. Tariffs at major ports are controlled by Tariff Authority for Major Ports (TAMP) under two regimes (TAMP 2005 and updated TAMP 2008), but the minor ports do not have such restrictions. Latest draft guidelines for tariff setting in major ports mention the need for de-regulation of tariffs for new projects in major ports.
Issues with current PPP framework
PPP projects at major ports have been plagued with litigations, delays and management problems, environment clearance, and disputes on TAMP revised tariff. Interest in bidding for new terminals at major ports has significantly reduced; some of the awarded projects have also been failures. During the corresponding period, states like Gujarat and Andhra Pradesh have had a fair degree of success in attracting private investment in their port projects. This situation is resulting in major ports losing market share to minor ports.
The biggest hurdle for private investment in port terminals at major ports has been the tariff regulatory risks arising from the TAMP policy. TAMP structure was initially put in place to prevent monopolistic behaviour by terminal operators. The chief issue with current TAMP guidelines is that it does not reward (but rather penalises) operational efficiency. As tariff is based on the estimated number of TEUs handled, measures that would help the terminal increase its throughput could result in lowering the tariffs during the next revision. This prevents private players from adopting measures to improve operational efficiency. Besides, the long gestation period for port projects hinders financial viability of these projects and increases difficulties for private players in raising necessary funds. Other issues include lack of clarity on bidding and qualification criteria, issues of security clearance for private operators, and matters related to land acquisition, delay in obtaining approvals and environmental clearances.
The government needs to replace the current tariff setting mechanism with a market-linked tariff policy. TAMP's role should be restricted to a market regulator, to check against un-realistic tariffs or practices, but it should not be involved in price controls. Any risk to exports due to increase in tariff is minimal, as cargo handling costs account for around five per cent of the costs. The current revenue share model can be enhanced by devising a performance-linked slab structureùthe Port Trust gets a fixed share of revenue up to a base-case TEU scenario. Any increase in the number of TEUs handled beyond this limit would lead to a greater proportion of revenues accruing to private operators. This measure would help to attract private sector in investing in major ports.