In his first full-fledged interview after being appointed shipping secretary in November 2009, K Mohandas talks to FE?s Praveen Kumar Singh and KG Narendranath about investor interest in the port sector and the distribution of traffic among ports, among other issues: Excerpts:

Prime Minister Manmohan Singh and the Planning Commission have estimated port capacity addition to fall short of the 11th Plan target by 40%. What are the key reasons for the lacklustre performance on adding new port capacities?

Port capacity development did not keep pace with the Five Year Plan target in the first half of the current Plan period. The primary reasons for this were procedural and documentation requirements. The finalisation of the model concession agreement and other documents took time. Also, port expansion was planned almost entirely through public private partnership and one of the pre-requisites for this was upfront fixation of tariff. But Tariff Authority for Major Port (TAMP), which was to fix the tariff, was virtually dysfunctional during the period since no full-time chairman was appointed.

The projects are now being taken up in full swing as all the required documents have been put in place and TAMP is fully functional. The target for the Plan period was to take the port capacity to more than 1,000 million tonne (mt) in major ports and 500 mt in non-major ports.

At the end of March 2009, the total capacity of major ports stood at 573 mt and minor ports had the strength to handle 250 mt of cargo. Based on the current pace of development, we expect the capacity of major ports to increase to 860 mt by March 31, 2012, whereas the capacity of minor ports will be 400 mt by then.

In 2010-11, 21 new projects are planned to be awarded and these projects will envisage a total investment of about Rs 14,000 crore. All the projects will be awarded through PPP route. The policy is that the government will remain as the land owner, while the new berths are to be developed and operated by the private sector.

Is there enough investor interest in the port sector?

There is a considerable interest from private players. We are getting investments from both India and abroad. Having said that, there is still a huge scope for investments as 100% foreign direct investment is allowed in the port sector through automatic route, subject to security clearance.

How have the investors and operators responded to the new system of port tariff fixation?

The current system is that of fixing tariffs upfront on a normative basis. Once the tariffs are fixed, the operators are selected on the basis of competitive bidding, which is conducted through revenue-sharing commitment with the port authority. The system is superior to the previous model and seems to be working well. Operators are often willing to offer a high share of revenue to the port authorities.

Is the government considering giving tariff freedom to major ports?

All the major ports, except the corporatised Ennore port, come under tariff regulation of TAMP. We are not in favour of further regulation. Instead, we are moving towards simplification of the tariff fixation model and some liberalisation. However, there are fixed standards that cannot be changed during the period of contract.

The idea is to have a system where TAMP would provide an oversight to the way tariffs are charged for various port services, rather than fixing the tariffs. Ports should have the freedom to fix tariffs on their own.

Has there been any movement towards this?

No substantial movement has been made yet. It is a long-drawn process

Is the government planning any new incentives for investors in the ports and shipping sectors?

The industry is asking the government to take more measures for the development of the sector. They want the government to help increase the traffic. The demand is reasonable, against the backdrop of the slowdown in the port tariff growth in the last two years on account of the global economic crisis and the resultant contraction in world trade. Although trade has started gaining pace recently, the growth is still low. The current growth (so far this fiscal) in port traffic is about 6% — quite lower than the Plan estimates.

According to international standards, the rate of port capacity expansion should be 30% higher than the increase in traffic to enable the ports to handle the traffic comfortably. This implies that if we want to ease the traffic, a lot more capacity has to be created at our ports. Last year, there was a 20% capacity addition at ports. By the end of the Plan period, the capacity of major and minor ports will be in the ratio of 2:1.

What is your view of the distribution of traffic among ports?

The traffic is more or less evenly distributed. There may be isolated cases of berths lying vacant.

How useful have the special mechanisms for infrastructure funding?the India Infrastructure Finance Company Ltd and viability gap funding?in the port sector been?

We are awarding the project on a build, operate and transfer basis for 30 years, which is more or less an acceptable model to investors. If any superior model is available to finance these projects, we are open to employing them as well. We would, of course, like to bring in more private players to manage the berths.

What is the average debt-equity ratio of new port projects?

The ratio varies since it depends on the available equity of private players and their ability to raise funds. But, as in most infrastructure project, there is a large debt component.

Is the government planning to reintroduce shipbuilding subsidy?

During the global economic slowdown, trade had contracted, leading to a reduction in freight charges. Port capacity addition and ship prices had also come down. The problem is that shipping companies are unable to take the delivery of ships they had ordered in good times. Thankfully, the situation is improving now and the year 2010 could see a visible improvement in the shipping sector.

Is there any move to reduce the tax incidence on the shipping industry?

The shipping industry often complains that it is unable to face competition from foreign players due to high taxes, although the tax incidence has come down a bit after the introduction of the tonnage tax regime. The demand is that the benign tonnage tax regime should be reinforced by not charging the normal rate of tax on reinvested funds.

Taxation of seafarers is also creating a burden in terms of higher cost and the unavailability of quality personnel. There is no immediate solution for this. We have brought the industry?s arguments before finance minister Pranab Mukherjee but since the demand is to exempt one section of the industry and impose taxes on another section, finding a solution is not very easy.

The government has proposed a new maritime policy. Can you give some indication on what all it encompasses?

It is the shipping ministry?s vision. It has just been drafted and needs to go through various levels. Since it involves inter-ministerial consultation, it is not proper for me to reveal its content now.

Is the ministry satisfied with a mere 50% increase in budgetary allocation this year, considering the need to strengthen the port and shipping sectors?

Let?s look at it from a different angle. All the major ports have sufficient resources for carrying out the capacity addition programme and improving the efficiency. We don?t give any funds to the ports for capacity addition. However, we will be required to give money for dredging work at ports. This is because the dredging cost adds to the port charges, but we need to bring these charges down to international standards to compete.

What are the expansion plans of Shipping Corporation of India (SCI)?

Currently, it has a $3-billion programme to increase the fleet.

Is SCI a candidate for disinvestment?

A total of 80% of the organisation is owned by the government and it may be a good candidate for part disinvestment, with the government holding the majority. The ministry is open to its disinvestment as the government can raise resources through the process and the company becomes more efficient. Currently, however, there is no proposal for disinvestment in SCI.