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Eventful journey ahead

Eventful journey ahead

After a hiatus in 2014, there are emerging signs of takers for PPP projects in some of the sectors, including ports. Baring some shortcomings, PPPs have achieved resonable success rate. However, it is too early to say that they have been a grand success.

In the past, developers have expressed interest in port projects, namely in container terminals, dry bulk and liquid terminals. Now the interest spans from building a greenfield port to operating a crane in the port. With growing investments, the government pegs a higher share from private players to build infrastructure. The estimated investment in ports before 2020 is Rs 2,960 billion, of which a major part has to be from private players.

The story so far is not a smooth path. Some predicted that PPP projects are staring at death knell until mid FY15, before gold-plating every project under PPP mode.

Industrial Activity to Drive Port Volumes The sector witnessed strong growth over eight per cent in FY15 after FY10, buttressed by the non-major ports throughput volumes growth of about 13 per cent. Mundra owned by Adani Ports and Special Economic Zone handled cargo of 144 MT, the highest among all ports. Kandla handled volume of 92.5 MT in FY15, the highest among major ports. Aligning with the GDP growth, port sector cargo volumes soared in FY14 and FY15. India Ratings & Research expects the economic growth to be 7.7 per cent in FY16.

Bidding Flaws Derailed Viability
Similar to road projects, in the initial years of PPP port projects, bidders espoused aggressive bidding- high revenue share to concession granting authorities. The revenue share ranged between 30 per cent and 40 per cent and in some of the cases, it was stretched to 50 per cent. The fallout of irrational bidding was termination of contract. Internationally experienced players backed out of the contract citing finance closure delays, payment of stamp duties for signing the contract documents, rupee depreciation, high cost of local financing and changed economic environment. Due to the lucrative bids, the port authorities extended timelines for signing of the agreement. However, at the end, cancellation of contracts swung cost of construction upwards.

Having borne the brunt previously, the bidders are cautious before applying for the new projects. In recent bids, the developers have bagged the contract with a single digit revenue share, reminiscent of the mellowed down road projects bids.

Grantors Flout Contractual Obligations Economic survey 2015 indicates that many infrastructure projects are stalled majorly due to environment clearance and land acquisition delays. In the recent past, developers have terminated the contract due to the non-completion of obligations by the project granting authority. In case of a Vizag coal handling project, authorities failed to maintain the required draft depth, which is one of the bidding conditions for a project to take off. Deep draught levels are prerequisite for entry of capesize vessels; hence the developer Vizag General Cargo Berth Pvt Ltd terminated the contract. In another project, Kandla Container Terminal Pvt Ltd terminated the project of a container loading facility at Kandla port, quoting the port authority´s failure to honour its contractual obligations relating to dredging, night navigation, rail connectivity and back-up land. Later, the high court of Gujarat, adjudged that Kandla Port has to pay Rs 1,100 million as a compensation. Due to the inordinate delays by Mumbai Port Trust in meeting its obligations, Gammon´s container terminal´s project cost upsurged leading to delays in debt servicing. Port authorities approving new projects should aim to fulfill the contractual obligations promptly and enable a holistic development of the ports.

Recent Policy Actions
Tariff Authority for Major Ports (TAMP) through its new guidelines metamorphosed the tariff setting mechanism in January 2015 from a regulated model to a market linked mechanism. With the change, a level playing field is set and major ports have leeway in setting tariffs based on the average revenue requirement, reasonable return on capital employed, and tariff indexed to inflation on fulfillment of performance standards. Port trusts have to ensure that new tariff should not lead to diversion of cargo to the competing port. However, the old terminal operators at major ports tariffs are still under regulation.

Although foreign direct investment is allowed 100 per cent under automatic route, the inflows have remained minimal over FY11-FY15. The government envisages implementation of mega ports collaboratively with a private partner under the landlord model. Selective relaxation of cabotage law for ports has not yielded desired results, hence an umbrella could bring benefits to all the ports.

Policy Push to Refresh Prospects
The federal government´s ´Make in India´ campaign has sown the seeds for sustainable development. However, policy efforts are required to harness it further. Port-led development could throw up challenges if the path is trodden with invisible thorns. The government should aim to redesign the policies to facilitate swifter completion of the projects. Some of the recommendations to spruce up PPPs are:

1.Clearances and Land Acquisitions Prior to Bidding: Finance Minister indicated his penchants for plug and play model. However, many projects go under the hammer sans complete land and approvals. In the recent contract award of Vizhinjam port, the implementing agency´s (Government of Kerala owned entity) role is to construct the basic infrastructure like breakwater and access. The port is envisaged as a transshipment hub, hence timely availability of the facilities is critical to the success of the project.
2.Independent Regulators to Resurrect: Several projects are stuck due to dragging dispute resolution process; both the concessionaire and grantor have failed on their obligations. Budget announcements indicate formation of regulatory law; however, the law is still in the draft stage.
3.Advisory Board: 3P India aims to streamline infrastructure projects and would project the iconic projects undertaken in the sector. 3P India will be an advisory institution, with overarching mandate to suggest measures to eliminate the impediments in the growth of the sector. A gamut of issues could be taken up for modifications, viz., concession agreements, bidding process and dispute resolution process.
4.Last Mile Connectivity: Accelerating the last mile connectivity for quicker cargo evacuation is crucial for major and non-major ports.

With the Modi Government stepping into another milestone year, it is imperative to regain completely the confidence of the investors. Also, right-sizing of the risks between the concessionaire and granting authority will create a conducive environment. Implementing agency should efficiently distinguish the projects to be modelled under PPP and its own banner. With the government´s focus on revisiting and shaping up the framework, next year is headed for an eventful journey.


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