Revenue model needs to change

In the revenue sharing model, an investor who is investing in the port project should also get some comfort level in the initial years, says Umesh Grover, Group Executive Director, Shipping & Infrastructure, SKIL Infrastructure. Sharing his thoughts with Sumantra Das, he believes that in initial years, there has to be a gestation period but as the cargo increases, the proportion of revenue share should also be increased.

What is the sentiment of private players in investing in port sector?
The sentiment have always been strong, however now somehow it's losing its sheen. This is attributed to although a structured but a cumbersome process of tendering and huge delays in award of a final contract. The Project viability itself undergoes a sea change in 2-3 years based on worldwide economic scenario which in turn drives the EXIM trade. If you look at the projects which have gone thru' the tendering process in last few years, very few have actually fructified and the success ratio is pathetic. Take for example, JNPT 4th Terminal , Mumbai Offshore Terminal, Vijhnjam, Haldia II dock Complex, all went thru' the competitive bidding process but were shelved time and again. It is a pity that each developer and consortium members, who spend a lot of their precious time and money whilst going thru' this hectic tendering process ultimately find that the project is either being re-tenderd or shelved. Furthermore, the entire shipping industry is going through a very tough phase and that has also adversely affected investment coming up in Port sector.

The government is now open to various suggestions from private players / experts to develop the sector. In the last two years, government has accepted many suggestions in pre-bid meetings and are trying to make the entire process user friendly. However, at the end of the day, time and cost overrun due to delays in finalizing a project has made investors more cautious.

What do you think of the current revenue sharing model as an enabler of private investment in port sector?
In today's scenario, I feel it is a big roadblock to the ports sector. Whilst some projects in the past have really benefited from this model, there have been instances where the Port / terminal developers have burnt their fingers. Interestingly, in subsequent years of Port / Terminal operations, with the costs rising but volumes increasing, stringent impractical TAMP orders forcing them to reduce the rates rather than giving an increase have further fuelled their woes. It is not that the current revenue sharing model is defective and is only to be blamed. I feel that some Developers and consortiums go overboard whilst tendering and offer a revenue sharing which is not sustainable in the long run leave apart at initial stages when the throughput is low. Just imagine 50 % margins. Port sector is not so lucrative for a developer to sustain after sharing 50% with the “landlord” . That too a commitment for 30 long years. I strongly believe that there has to be a methodology wherein based on certain parameters , the revenue model is to be reviewed say every five years.

Taking that into account, in my opinion this is not a very successful model unless radical changes are brought in e.g. a periodical review and lesser interference from agencies like TAMP. I believe privately owned Ports such as Mundra & Pipavav have a better model

What can be a sustainable model?
I think I have already answered this question. The revenue sharing with a periodical review and free from interference & clutches of TAMP is a way forward. Another successful model is Mundra & Pipavav. However I would add that for a success and sustainability of of any Port three factors are essential. i.e. good connectivity (rail & road), a good catchment area for the cargoes and last but not the least availability of reasonably good draft at the waterfront The revenue sharing in my opinion has to be more “flexi” which can only happen if there is a periodical review. How can anyone predict ones earnings / revenues for next 30 years ! The current model is too theoretical. Though the existing players are all experts in their field but they too whilst tendering, sensing the competition mood go very aggressive and offer an unsustainable revenue sharing percentage.

Is lack of infrastructure in Indian ports a factor in making projects unattractive for private investment?
Yes, very much. Let us take the example of some newly developed ports . One of them is a big port with excellent infrastructure but the problem is that connectivity is lacking and t evacuation of cargo is a big challenge. I strongly believe that basic infrastructure such as Rail /Road connectivity, capital dredging etc. should be the responsibility of the Government. Let us take an example of Vijhinzam, wherein Kerala Govt, took the initiatives and agreed to provide the basic infrastructure, including breakwater , capital dredging, reclamation of land etc. It is a pity that despite tis major step by Govt. of Kerala, the project has not moved. l feel if basic Infrastructure is catered for by the Government, flow of private investment will be there in the sector.

In port development, slow process of clearances also has an impact on cost overrun making the project unviable. What should be the solution?
I have already touched upon this in your earlier question but let me add to what I have said. When inviting the bids for Port Development projects, the government should take the lead in getting all the clearances ( including environmental clearance) not only for Govt Projects but also act as a facilitator for the private port projects. After all it is the EXIM & Domestic trade of the country and in turn the economy which will get a boost. A glaring example is the case of Rewas port which Reliance along with Amma Lines and others have been planning for over a decade now. A mega project of this magnitude with 25-26 berths and 16-18 mtrs draft with an independent navigational channel, if conceptualized will certainly be a big booster for the Port sector as Mumbai / JNPT region continues to be the “most preffered location” and even today handles over 50 % of the countries EXIM cargo. What continues to remain a roadblock is various clearances, which do not seem to be forthcoming.

In the present economic scenario, it is less business and many ports. Do you think it becomes a burden for not getting fresh investment in the sector?
I do not believe that is correct. If you take 180 odd minor ports they are only numbers. Some of the ports are non-functional and some handle very little cargoes. The basic infrastructure in these ports & connectivity is practically non-existent. So out of 180 ports a handful of 15-20 odd ports including large private ports like Krishnapatnam, Mundra and Pipavav, are active and rest do not matter to ports infrastructure. It is these ports along with 12 major ports which perhaps cater to 95 % EXIM cargo.

Do you consider PPP a successful model in port infrastructure?
Yes. But again the risks are certain bottlenecks and obstacles which the private players find it difficult to clear. The government has to acquire the land first. In the case of the Dedicated Freight Corridor, it is now over 15 years and it is still not in the horizon. The cost envisaged 15 years back has gone up several folds. The country's economic growth is suffering. If dedicated freight corridor is there and ports are big enough, we can increase our world share in several sectors. The Government has to provide basic infrastructure and ensure timely award of contracts to make PPP a success.

Given this scenario, will the Maritime Agenda 2020 facilitate private investment in coming years? Will India be able to support future port capacity utilisation without private sector investment?
If you see Maritime Agenda2010- 2020, the amount stipulated in the port sector is with PPP model in place. Even in NMDP (2007-12) an estimated amount of Rs 55,000 Crores was on Port Sector & some 40 odd projects worth Rs 20,000 crores were thru' private sector participation. As per Maritime Agenda the estimated Port capacity is likely to double and likely to cross 2 Billion mt. Even on a pessimistic scenario, it is projected to go up to 1.6 billion tonnes. Obviously the success will be from private sector investment. It is simple – the Government needs the private sector and the private sector needs the Govt Projects for their survival. The Govt cannot achieve the targets without private sector investment. However, The Government has to allocate certain budget for the basic infrastructure. Lastly, even if 50-60 % of the projects in Maritime Agenda actually fructify, I will say it is a success.