Eroding Authority

By: | Updated: July 8, 2015 2:09 AM

The 12 public sector, or major ports, have been campaigning hard for abolishing the Tariff Authority for Major Ports (Tamp) for a few years, but perhaps the time for Tamp to go is now, than later.

The 12 public sector, or major ports, have been campaigning hard for abolishing the Tariff Authority for Major Ports (Tamp) for a few years, but perhaps the time for Tamp to go is now, than later. If major ports have to stay competitive with the non-major or private sector ports, whose market share is on a constant rise, they have to become more market-oriented and efficient, and Tamp seems one big hurdle in the way.

Tamp was set up in April 1997 as an independent authority to regulate all tariffs, both vessel and cargo related, and rates for lease of properties in major port trusts and the private operators located in them.

However, over the years, instead of incentivising efficiency, the regulations have ended up discouraging efficiency. According to a recent Citi Research report, the tariff setting mechanism basically follows a ROCE, or return on capital employed, approach with a provision for pass-through of operating and capital costs. But the tariff setting mechanism historically has resulted in rather sharp tariff cuts for private terminals at major ports.

eroding

The reason, Citi report explains, is that capital employed (CE) is calculated as net fixed assets derived after knocking off accumulated depreciation, because of which CE keeps declining with the passage of time, pulling down absolute returns. Further, the tariffs are adjusted downwards, if an operator manages to achieve efficiencies and handle higher volumes.

Industry experts say while these guidelines were there to favour the port users, as they can benefit on the charges they pay if there are efficiency gains at the ports, actually this mechanism led to sharp tariff cuts, of up to 15-40% at different terminals. “Few businesses can deal with this kind of sharp tariff cuts. In the past, various terminal operators have approached courts for relief from sharp tariff cuts and/or have cut back on cargo volumes to avoid these cuts,” the Citi report observes.

With such a restrictive tariff regime, major ports have been on the receiving end of falling market share, capacity growth restrictions and fall in efficiency, which is turning into a gain for non-major ports. Data from the ministry of shipping and the Indian Ports Association shows the market share of non-major ports, which stood at 7% in FY1990, grew to 19% in FY2000, to 26% in FY04, to 34% in FY10 and to 43% in FY14. While, the major ports share has declined from more than 90% in the 1990s to 57% in FY14.

Successive governments have seemed to acknowledge the loopholes in the tariff regime and have tried to rectify the shortcomings, however, not much has changed. In fact, there are three different sets of tariff guidelines in existence—issued in 2005, 2008 and 2013. Which means, that at a single port, different terminals can operate under different tariff setting mechanisms.

“Essentially, 2005 guidelines fixed a rigid cap on tariffs based on ROCE norms and 2008 guidelines started giving a 60% of WPI-linked escalation in tariff to new PPP projects at major ports. Guidelines for 2013 went a small step further by allowing new PPP operators to charge up to15% more above the highest regulated tariff at the port,” says the Citi report.

Officials at public sector ports told FE that “with every passing year, the ability to compete with the growth of non-major ports is becoming a challenge. “Around seven-eight years back, when there was a boom in iron-ore exports, as China was importing ore in large quantities with the ensuing Olympics, all private ports and the railways had hiked rates for iron ore. We could not raise a single paisa at that time and lost a good revenue earning opportunity because our rates were fixed and we could not change them,” said a senior port official at a public sector port.

“Once we fix a tariff, it takes anything between three-six months for those rates to get approved by Tamp, and by that time the market dynamics will be completely changed,” he adds, outlining the challenges with the Tamp fixed tariff regime.

“We need a level-playing field with non-major ports,” said a senior official of another major port. “Even though there is an opportunity to gain from the changing market, the regime restricts our earnings, which also impacts our capacity expansion plans and fund raising abilities,” he said.

However, according to ratings agency Icra, between January-February 2015, two key developments took place which indicates that reforms concerning tariff setting process and practices have gathered momentum.

Icra says Tamp has issued the policy guidelines in 2015, allowing market-linked tariff for major port trusts. The guidelines also require the major ports to adhere to performance standards committed by them to get the indexation benefits, in which the rates would be indexed to WPI every year. This benefit is denied, if the standards are not met.

Meanwhile, Attorney General (AG) has favoured private operators at major ports operating under 2005 and 2008 guidelines to migrate to the new market-linked tariff regime, for which Cabinet approval is awaited. “A uniform application of 2013 guidelines to all existing terminal operators will provide the requisite impetus to fresh investments in the sector for capacity creation as well as for advanced technology in the existing terminals,” K. Ravichandran of Icra observes in a March 2015 report. This, he said, will improve operational efficiencies and provide better services to the trade, which will support volume growth at the major ports until the planned capacity additions come on stream.

However, port officials at major ports seem to be in favour of a fully liberalised tariff regime governed by market forces, like the one that exists for non-major ports, with Tamp’s role as more of a regulator for the shipping and port sector. Would their wish be granted is something remains to be seen.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition