Time to revisit port legislations

Ports in India have always been taken recourse to Port Trusts, but after the arrival of PPP in ports, this should change, says A Balasubramanian. Instead of trying to tweak the existing laws, he says, new legislation is warranted that includes regulation that covers technical aspects as well.

The current efforts by the Government of India to focus on port infrastructure, including enac­ting new legislation covering all federal and state ports, is commendable. This must be perceived as a rare opportunity to generate an informed debate among the stakeholders, and articulate the strategic intent, end objectives and roadmap for the port industry of the future, before attempting to amend the existing framework as it is difficult and costly to reverse later. The state ports have been growing manifold principally through Public-Private Participation (PPP) and other initiatives in the last few decades. Even in this better environment, federal ports have been unable to grow to their potential either by themselves or through PPP initiatives. As the waterfront for any country is limited, it is important sooner or later to leverage upon the potential in federal ports (which still account for two thirds of national traffic). But is the existing legal framework adequate and appropriate for the changing times and if it is not, what is the way forward?

Evolution of port legislation

Ports provided safe havens for ships for leisure or trade and there was a need to conserve the ports so as to ensure safe navigation and pilotage. Indian ports Act, 1908 was conceived and enacted to ensure these arrangements. Over a period of time, some of the harbours including in Madras, Calcutta and Bombay were developed into ports with public funds to provide in addition facilities for handling cargo and passengers and each of these had separate legislation. Later when the Government of India set up the major ports in Cochin, Visakhapatnam and Kandla, these ports were initially administered direct by the GoI. Since decisions could not be taken locally except by reference to GoI and also as trade interests wanted a direct voice in the administration of ports, a new legislation Major Port Trust Act 1963 (MPTA) was enacted and made appli­cable to these new major ports and other new ports of the future. In 1974 the old ports of Bombay, Madras and Calcutta were also brought under this act.

Does the federal port trust model continue to be relevant? MPTA was enacted in 1963 to administer the ports locally with representation of trade interests. In essence, the Act constituted local authorities to administer in trust for the trade. The Board of Trustees has 17 or 19 members and includes the users as well. Key commercial decisions on appointments, budgets and execution of major capital expenditure work require central government approval. Port business has been thrown open in nineties for private investment and operations in port terminals in federal ports and in the entire port or terminals in state ports. This has ushered in intense competition in the port industry impairing the erstwhile premier position enjoyed by port trusts. Before port business was opened to PPP, major port trusts set tariff themselves subject to approval by the government. But post PPP, to separate dual role of operator-cum-self regulator, tariff levied on users by port trusts and private terminals in federal ports have been brought under a regulator namely Tariff Authority for Major Ports (TAMP).

To enable major port trusts enjoy autonomy in decision making commensurate with the business dyn­amics, Sec 42(3A) was inserted in the year 2000 emp­owering port trusts to enter into JV with any person or body corporate for performing its services. Sec 88 which defines areas of investment for port trusts was also amended in 2000 by adding Sec 88 (d) and (e) to allow port trusts to invest in joint ventures within own port limits and in other major and other ports subject to government approval. But no significant investments have been made so far leveraging on these legislative amendments so far in spite of significant passage of time.

Is corporatisation of federal port trusts the answer? Now there is a proposal to corporatise port trusts on the lines of the successful experience of the Port of Singapore. A corporatised port is said to be free to pursue business models and practices which are customer driven. Experience so far seems to suggest that these assump­tions are aggressive and are not tenable in the current Indian political and economic context.

Ideally, service delivery in federal ports in India would be the best left to the private sector whose incentives to cater to customer needs are greater. In case public sector should continue to be in charge of service delivery for whatsoever reason, the existing port trusts should be unbundled into business units and regulatory units. The business units should be corporatised by inducting a strategic port operator with significant equity stake and management control.

The residual regulatory unit may continue to be port trust playing the role of the landlord but would require significant capacity building in terms of playing landlord role well. In short, to play the landlord role effectively, the managers have to be enabled by training in commercial skill sets and empowered to take key decisions and to induct in the Board persons with the right type of expertise and independence under an equitable compensation structure.

Framework for PPP in Indian ports

Facilitating PPP by MPTA: In federal port trusts governed by MPTA, PPP facilitation is indirect and inferred. PPP activities (say BOT) would involve rendering “services” and execution of certain “works”. Sec 42 (1) lists “services” which Board can do and Sec 42 (3) allows the Board to permit any person (read BOT operator) to perform these with GoI approval. While no time limit is specified for the same in the MPTA, the executive arm of the GoI (namely PPP Guidelines by GoI) limits it to 30 years on BOT basis. Sec 35(2) lists the works which Board could execute on its own (wharves, etc) within the port limits. But Sec 46 says that no person (read private operator) can erect private wharves, etc without Board approval and subject to terms Board may specify. So a combined reading of Sec 35 (2) and Sec 46 for the works and a combined reading of Sec 42(1) and 42(3) for services and Sec 42 (3A) for joint venture of the Board with private investors enables PPP in the nature of BOT. However these PPP decisions of the Board require approval from the GoI as Sec 93 requires works exceeding set limits to obtain GoI approval before execution/contracting out (read BOT) by the Board. An amendment of MPTA in future
should capture all the aspects of the PPP together (instead of piece meal dealing as of now) empowering the concessioning authority clearly for investor comfort leaving no room for ambiguity.

Risk of revisiting commitments on PPP: Under the MPTA, GoI has the overarching power vide Sec 111 to issue directions to the Board (who is the concessioning authority) on questions of “policy” and the decision of GoI on whether a question is one of policy or not should be final. As any PPP concession agreement may have several policy issues, there is a legitimate appre­hension for the BOT investors on the possibility of some aspects of the Concession agreement being re-visited by GoI after the award of the Concession. In such eventuality, future amendment to MPTA would call for a provision to protect and honour the commitments to the PPP investor by the Board notwithstanding the action by GoI to supersede the Board.

Regulatory framework in retrospect and prospect

Tariff regulation: TAMP frames and regulates tariff levied by terminal operators (public and private) in major ports. At a different level, the regulator is also subject to the risk of intervention by the GoI, adding one more layer of uncertainty for the private investor in federal ports as vide Sec 111, GoI is empowered to issue directions to TAMP on questions of “policy” and GoI decision on whether a question is one of policy or not shall be final (Sec 111). It is noteworthy to observe the lessons from the relatively successful PPP experience in state ports.

Tariff and commercial freedom to develop the state ports have yielded optimum results sometimes prompting private investors to assume risks higher than in federal ports such as in investing in connectivity (rail as in Pipavav and Mundra by private investors) and assuming development risks of a higher magnitude in the absence of traffic history and having to secure project clearances from scratch in the absence of existing infrastructure as in federal ports).

At a larger level, tariff regulation at terminal level exists in very few countries such as India where again only federal ports are regulated. Terminal tariff is a minor component of system costs but it is regulated. It is the system cost arising from delayed ship handling and high intermediary costs which render Indian trade un­competitive. Also with the advent of many competing terminals in India, tariff can be left to market forces. Given the unequal level playing field between port terminals due to connectivity and trade-friendly loca­tion, there can be scope for abuse of dominance and other cases of market failure but these can be left to the newly formed Competition Commission of India.

Technical regulation: Conservator is responsible for ensuring cleaner seas and safer shipping under the inter­national maritime conventions. Often each port has its own style of conservancy. If a maritime accident in Mumbai could halt the trade for days we can imagine the consequences in case of any maritime pollution which can spread all over making our waters unfit for trade or movement. Given the sensitivity of the waters for na­tional trade and security interests there is the need for reviewing and empowering a technically competent insti­tutional authority to ensure common conservancy code and contemporary safety levels across Indian coast. In short, port business may be free but port waters are not.

Way forward

Clearly, there is a need for debate on the strategic intent and direction of the port industry and to identify the approach for the same before initiating changes in port legislation especially concerning PPP. As law can capture only the intentions of the policy makers, a new legislation however well drafted offers no panacea for PPP if the policy objectives of PPP are not clear and consistent. A well considered port policy including in PPP is all the more important as Courts of law would refrain from reviewing policy decisions of the government in case of disputes entailing PPP. The author is conscious of the potential of the executive guidelines on PPP (besides sector legislation) to influence the quality of outcomes but these are beyond the scope of this article.

The author is Senior Director at IDFC, a lawyer and a financier. IDFC is a financial institution focused on infrastructure financing. Views are personal.