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  1. PPPs at state-run ports: Slew of steps to boost investor confidence

PPPs at state-run ports: Slew of steps to boost investor confidence

Royalty on actuals, easier exit, broader ‘change in law’ proviso among new incentives.

By: | New Delhi/mumbai | Published: January 4, 2018 6:17 AM
ppp, state run ports, slew of steps, boost investor confidence, investor confidence, private investments, fixed assets creation Royalty on actuals, easier exit, broader ‘change in law’ proviso among new incentives. (Image: Thinkstock)

The Cabinet on Wednesday approved a slew of steps to spur private investments via the public-private partnership (PPP) route in the country’s ‘major’ (state-run) ports, a sector that hasn’t seen as much fixed assets creation as required to bring in the level of competition needed to fast-track cargo movement and pare the country’s high logistic costs. Although the changes fell far short of freeing of tariffs for assorted port services, new investors will have a major relief as future contracts will allow them to share royalty with the port authorities on discounted tariffs, rather than as a percentage of gross revenue based on tariff ceiling fixed by the regulator at the time of bidding. Other steps announced include easier exit akin to what investors in highway projects enjoy, immunity from post-model concession agreement (MCA) threat to project viability from regulatory (Tariff Authority on Major Ports) orders and changes in environmental and labour laws and imposition of or hikes in indirect taxes. A dispute resolution mechanism — Sarod-Ports — has also been provided for, again on the line of the one for PPPs in the highways sector. New developers will also be allowed to commence operations before the commercial operations date (COD), a move that could lead to better utilisation of assets leased out by the port before the formal completion certificate. Further, a new refinancing facility will make available low-cost long-term funds to concessionaires. Briefing reporters after the Cabinet meeting, road transport and highways minister Nitin Gadkari said the Centre has set up a ministerial panel headed by finance minister Arun Jaitley to look into the issues revolving around a dozen stalled port projects involving cumulative investments of Rs 20,000 crore.

Apart from the shipping ministry, the committee will also have representatives from the law ministry and NITI Aayog, he said, adding that issues to be handled by the panel would include those related to terminals, land lease, storage capacity, etc. One reason why investment in port services via the PPP route is not very attractive is the high revenue share — close to 40% in some cases — which inflates the costs. A better model, analysts have argued for long, would have been to treat the revenue share as a fixed component (say, at 20%) and tariff as the variable for bidding so that operators have higher incentive to be more efficient. The latest amendments have not met this demand. According to the revised MCA, developers can exit a project by way of divesting equity up to 100% after completion of two years from the COD. Under the extant contracts, the developer can exit all but 26% stake after three years from COD. In another measure that would help cut costs, rent on “additional land” has been reduced from 200% to 120% of the applicable scale of rates.

BVJK Sharma, joint managing director and CEO, JSW Infrastructure, welcomed the latest move by the government and said it would draw wider participation from international players. “For instance, post-COD, those with less risk appetite can come; those with higher risk appetite can even come during the greenfield stage. So this could be a new phase in the ports sector in India,” he said . However, he added that “if the government wanted to unlock capacity before building new capacity, it should allow transition to the new MCA for existing players also”. On the facility to exit projects completely in two years from COD, Sharma expressed the apprehension that this could encourage engineering, procurement and construction (EPC) companies that could bid aggressively to bag the contracts, rather than long-time operators. “One will need to ensure that quality is adhered to with strict monitoring of such EPC contracts,” he said.

Manish Sharma, partner at PwC India, however, said: “Considering that the risk appetite of a developer is significantly higher than that of port operators, who are generally averse to construction and development risks, the decision to allow 100% exit in two years of achieving COD is a welcome step that will provide the much needed liquidity to PPP developers and enable more transactions in port sector.” “concessionaire would pay royalty on ‘per MT of cargo/TEU handled’ basis which would be indexed to the variations in the WPI annually. This will replace the present procedure of charging royalty which is equal to the percentage of gross revenue, quoted during bidding, calculated on the basis of upfront normative tariff ceiling prescribed by TAMP. This will help resolve the long-pending grievances of PPP operators that revenue share is payable on ceiling tariff and price discounts are ignored. The problems associated with fixing storage charges by TAMP and collection of revenue share on storage charges which has plagued many projects will also get eliminated,” the government said in a statement issued after the Cabinet meeting.

Until a few years earlier, an auction was conducted before tariffs were fixed — that is, the operator was selected on the basis of the royalty he would give the port authority and TAMP then fixed the tariff using a cost-plus method under which the operator was allowed 15% return on the capital employed. That system allowed the bidders to inflate expenditure and get the tariffs fixed accordingly for three years. This set-up was later improved upon and under the current system, TAMP first fixes the tariffs upper limit for the relevant port services in consultation with the potential bidders and the bidding takes place subsequently, with the revenue share as percentage of tariff as the variable. The return on equity is 16% now. While private-sector ports are thriving — some of them have capacities higher than the so-called major ports in the government sector — private investments in PPP projects in the 12 major ports have been stagnant. Except PSA International, which is investing Rs 3,500 crore in JNPT for a terminal of about 4 million TEU capacity, no worthwhile investments have taken place in the sector over the last three years.

According to PwC’s Sharma, the changeover from revenue share to royalty at actuals would on one hand protect the revenues of operators operating in a multi-terminal or multi-port system who are exposed to tariff competition while, at the same time, when coupled with changes proposed on deployment of efficiency improvement measures, would also incentivise efficiency in operations whose gains could now be retained by the operator. “The decision to introduce dispute resolution system which will also include existing terminals within its ambit is a very welcome step and would incentivise investment sentiment in the sector. Likewise the changes in ‘change in law’ provisions would address a long standing demand of sector players and provide a positive fillip to investment sentiments in this sector,” he added.

The country’s logistics costs account for as much as 15-16% of the consignment value, eroding its trade competitiveness, according to a recent paper by Bibek Debroy, chairman of the Prime Minister’s Economic Advisory Council, and Kishore Desai. It said despite progress made in the past three years, it takes more than six days to export and more than 13 days to import. India’s logistics costs are higher than those of around 10% (of consignment value) in developed nations. In fact, around 70% of the delays (both in exports and imports across Delhi and Mumbai) are on the account of port or border handling processes, which essentially pertain to the multiplicity and complexity of the overall procedures at ports, said the paper. The logistics sector contributes to more than 13% of India’s GDP and employs more than 22 million.

The existing port capacity in India is a trifle more than the throughput, but the capacity-to-traffic ratio is less than the 1.3:1, the global norm for efficiency, leading to congestion at many large ports. According to a maritime expert who doesn’t wish to be identified, the changes have helped address long-pending issues that were bothering private investors at major ports. “In any case, for the duration of the concession agreement, whether 10, 30 or 50 years, it is practically impossible to forecast the business model in the current global environment and, hence, to attract more investments in the ambitious Sagarmala programme, such steps were the need of the hour,” he said.

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