Prize for My Essay

Prize winners of the essay contest with Mr Young Sam Ma, Ambassador for Performance Evaluation and  Public Diplomacy, Ministry of Foreign Affairs and Trade, Republic of Korea, during a reception in Seoul on Thursday, Dec 20, 2012. The certificate and prize for my essay.

My essay 'Korea - The Epitome of Yin-Yang' was selected for the Gold Prize by Korea's Ministry of Foreign Affairs and Trade, in a competition held recently. At a reception held at the ministry headquarters in Seoul on December 20, 2012, the Ambassador for Performance Evaluation and Public Diplomacy, Mr Young Sam Ma, gave away certificates and prizes. He said the ministry is glad to receive valuable feedback and suggestions from writers on improving Korea's national image and expressed hope to sustain the rapport.

Coal Heats Up Bulk Ports

Value for the Right Price

As the exim potential of Indian ports goes up, it is time to scrutinise the tariff regulations bothering government-run ports as the industry opines that tariffs are being curtailed at the cost of trade.

by Radhika Rani G.

When the Tariff Authority for Major Ports was born in 1997, the mandate was clear: the tariff regulation would cease once enough competition was generated. Fourteen years since, competition has increased tremendously in the ports sector and capacities too have grown multifold but the role of TAMP still goes on with little change.

At times like these when capacity seems to outstrip demand – an additional 402.91 million tonnes of capacity targeted for the fiscal 2011-12 and major ports expected to reach 800.41 million tonnes – the role of TAMP comes under close scrutiny.

Multiple private facilities are available at all ports both for bulk / break bulk and container handling with most major ports having multiple concessionaires. So, competing for the big pie are not just the government-run ports, but other big ones in the non-major league like Pipavav, Adani, Kakinada, Dighi, Krishnapatnam, Gangavaram and Jaigarh.

Given this scenario, the notifications by TAMP against tariff reductions has been sending confused signals to port managements. For instance, TAMP notified Nhava Sheva International Container Terminal Private Limited (NSICTPL) on March 1 this year about a rate cut of 27.85 per cent as against a proposed tariff increase of 30 per cent by DP World; intimated Chennai International Terminal Pvt Ltd (CITPL) on February 14 about rate cut of 12.23 per cent as against a requested hike of 15 per cent and notified APM Terminals on February 8 about a rate cut of 44.28 per cent at Gateway Terminals India Pvt Ltd as against a hike of 8.72 per cent.

Taken aback by such orders, CITPL submitted to the authority saying, “The existing tariffs are not remunerative enough. We incur loss, even without considering revenue share.” These and other observations made by port users and user organisations, as mentioned in the order go on to substantiate CITPL’s request for a tariff hike.

A deficit of Rs 247.46 crore has been incurred up to December 2011, CITPL says. “During the next three years, (we) will incur a deficit of Rs 100.35 crore. The tariff should be increased by Rs 422.79 per teu in order to meet the shortfall of Rs 103.20 crore. The present rate being Rs 3,007 per teu, it is requested that the tariff be revised to Rs 3,458 per teu. This will be an increase of 15 per cent over the existing tariff,” it states.

The important reasons being cited by the PSA-operated container terminal are:

• Steadily growing volumes and so the need to inject capital to add superstructure and improve efficiency
• Growing lending rates. Approaching loan repayment date, but inadequate cash flow
• Need to induct additional equipment to service the trade better and remain competitive
• Need to deploy additional quay cranes and yard cranes to utilise the quay length of 832 m optimally.
• Maximum gross tonnage as per license agreement mentions around 5 lakhs teu but also points out generally about handling around 1.2 million teu which is not possible without additional equipment.
• Safeguarding the interest of consignors/consignees and other port users.
• Ensuring just and fair return to ports
• The factors which will encourage competition, efficient use of resources, efficiency in performance and optimum investment.
• The established costing methodologies (including cost plus approach, normative cost based approach) and pricing principles..
• The policy directions issued by the Central Government under section 111 of the MPT Act, 1963
• Ensuring transparency and participative approach while discharging its functions.
• Leveraging tariff to improve operational efficiency of the ports.
• Overall long term objective will be to move to competitive pricing and to move performance of Indian Ports to internationally competitive levels.

These and several other operational issues are being cited by ports for the need to increase tariff. For instance, based on the cost position calculated for a traffic of 11,95,740 teu for the years 2012 to 2014, the NSICTPL has sought an across-the-board increase of 37.50 per cent over the level of tariff prevailing in the year 2011.

“Please fix tariff which will reward efficiency and allow us to recover all legitimate cost,” NSICTPL simply puts it. “Trade does not mind paying slightly higher tariff for efficient and reliable services, which we always provide,” the DP-World managed terminal submits to TAMP.

Merchants and custom house associations too share a similar view. Trade seeks better services, facilitation of cargo handling and finally value for money. “We are more interested in efficiency / productively than tariff,” clarifies Bombay Custom House Agents Association (BCHAA). “We feel efficiency should be rewarded,” seconds the Indian Merchants Chamber. “We request TAMP to fix tariff which will be fair,” says the Container Shipping Lines Association (CSLA).

It may be noted that all the major ports in India follow a cost-based pricing where TAMP is responsible for setting the tariff whereas the non-major or private ports are ruled by market-driven prices. According to analysts, this is precisely the reason why government-controlled ports and terminals have been pushing for a lacuna-free and reformed price regulation to face competition from greenfield ports.

CITPL says it has to look for something other than lower tariff to compete with its neighbouring terminals coming up in a big way. “New terminals coming up around are handsomely equipped: Kattupalli with 6 QCs and 15 RTGs, Krishnapatnam (planned) with 6 QCs and 11 RTGs, Karaikal with 2 QCs, Ennore (planned) with 8 QCs and 33 RTGs and CCTPL with 8 QCs and 24 RTGs. CITPL with 3 QCs is in a very weak position to compete,” it reasons out.

TAMP, says its chairperson Rani Jadhav, is committed to the participative process of decision making. “In conformity with this stated position, we have been interacting with the user groups/organisations (concerned) in each of the tariff proceedings. To enhance transparency in our functioning and to adhere to the principles of natural justice, we always attempt to convey our decisions through self-contained and reasoned orders.” And several orders have been issued during the last one year seeking “judicious” revision of rates.

In the ultimate analysis, “Any service sector has to be subject to an appropriate regulatory framework,” says the government. As port development activity picks up pace in the country, issues concerning national security and quality of service are bound to arise. And so the government sees the need for some standards under which ports operate and transparency in tariff. The ministry has been harping on the need for a system that will bring all the ports under the same type of regulatory regime. On the other hand, once ports are corporatised, they go out of the purview of TAMP.

TAMP has been reiterating that tariff fixation cannot be a mere arithmetic exercise in the cost plus framework but the one which balances the interest of users and port operators and needs to take into account the long-term financial viability of operators so as to encourage flow of much-needed private investment into the port sector.

However, private sector involvement, says APM Terminals CEO Kim Fejfer, will be a crucial component of this growth if the investment and regulatory environment in India do not act as constraints. “Port tariff regulations which penalise increased throughput and productivity will not assist in developing the needed infrastructure,” he stresses.

The efficient terminals have heavy capital base with loan financing and huge debt service obligations, says Indian Private Ports and Terminals Association (IPPTA). With reduced tariff and huge debt servicing, the financials of the terminal operators will be severely affected making the investment unviable in the years to come. 

“Therefore, there is a need to revise the existing guidelines to award the efficient terminal operators,” exhorts Shashank Kulkarni, secretary general of IPPTA.

ICRA, in its rating features, says the tariff fixing methodology under TAMP has had a negative impact on the profitability and returns of PPP project developers because of several factors. These include the lengthy process of tariff fixing and review; anomalies in the tariff setting mechanism (like not allowing full pass-through of revenue share); low rate of allowed tariff increase because of indexation to inflation; and uncertainty on whether the operator would be allowed a tariff increase if its investment was higher than originally envisaged (because of changes in the scope of the project etc). 

Going forward, the success of the PPP framework in the port sector hinges on the way these issues are addressed; some progress on this front has been made with certain regulatory and policy initiatives being taken.

ICRA therefore calls for a three-pronged strategy to improve the tariff setting mechanism: streamlining TAMP procedures and building in-house capacity in the short term; delegating the tariff setting function to the respective port trusts over the medium term and allowing market forces to determine tariffs over the long term with the role of the port authorities being limited to oversight. 

TERI guidelines

Interestingly, The Energy and Resources Institute, assigned by the Ministry with the task of ‘Review of 2005 Tariff Guidelines of TAMP’, has come out with its observations. The report uploaded on the Ministry of Shipping website is open for comments from the industry till April 19, 2012. 

“The only change,” the TERI report says, “that was effected in the interim period (February 1998-March 2005) was to allow the pass through of royalty / revenue sharing to a limited extent to private terminals that were set up through BOT bidding processes finalized before 29th July 2003. Thus even in terms of the 2005 GL there were two tariff regimes – one pertaining to BOT bidding processes finalised before 29th July 2003 and the other in respect of BOT bidding processes completed thereafter.”

TERI has attempted to bring terminals from a tariff regime that was based on a cost-plus approach to a regime-based on a normative approach. However, in fairness to the existing facilities the determination of capacity and capital costs have been based on the actuals and not on norms as in the case of the 2008 GL, the report says. It is never the less important that the terminals are also over a period of time made to achieve the levels of efficiency and productivity that are possible based on the land and water front allotted to them. 

Eventually, they should be brought under the 2008 GL so that maximum efficiencies can be achieved. It is therefore recommended that the 2008 GL as revised in 2013, when the revision is due, should be made applicable to these terminals by 2020. That will give them a period of 7 years to make the necessary investments in civil works and equipment to comply with the norms of 2013 by 2020. The investments required for this should, no doubt, be taken into account for the purpose of calculating the RoCE, the report adds.

Prescription of norms and tariff setting by TAMP can never ensure that all the terminals operate with the similar levels of efficiency, using the best available technology. It is only competition that can achieve this. It is therefore for consideration whether the private terminals and cargo specific terminals at ports should be freed from tariff setting and allowed to compete between themselves and non-major Ports; TAMP and / or the CCI could step in if competition is unfair or charges usurious.

The TERI Approach

TAMP shall rationalize the tariff structures and streamline tariff setting system, says The Energy and Resources Institute. It will follow the normative cost-based approach applicable to private and cargo specific port terminals. In fixing tariffs, TAMP will be guided by:

‘Royalty/Revenue share’ payable to the landlord port by the private operator will not be allowed as an admissible cost for tariff computation as decided by the Govt in the Ministry of Shipping vide its Order No. PR-14019/6/2002-PG dt 29th July 2003. In those BOT cases where bidding process was finalised before 29 July 2003, the tariff computation will take into account royalty / revenue sharing as cost for tariff fixation in such a manner as to avoid likely loss to the operator on account of the royalty / revenue share not being taken into account, subject to maximum of the amount quoted by the next lowest bidder.

Port of Rotterdam: Vision for Speeding up Action

As the world’s leading ports strive to keep up their position, Rotterdam Port comes up with Port Vision 2030, a vision document that articulates the ambition and the vision of the port and its industrial complex.

Titled Port Compass, the vision document covers the length and breadth of the various milestones that the leading port in Europe can achieve with the help of its clients, government departments, knowledge institutes and societal organisations. The document lists out nine success factors, each with a concrete ambition and followed by a number of different challenges that need to be fulfilled to realise the ambition – investment climate, land use, accessibility, shipping, environment, safety and quality of life, labour, city and region, laws and regulations and finally innovation.

According to the report, in 2030, the Rotterdam industry and energy sector will function as an integrated complex with Antwerp. This will mark the emergence of the largest, most modern and sustainable petrochemical and energy complex of Europe. This complex will compete on world scale through its cluster advantages, integrated supply chains and energy-efficiency. Towards this end, the transition to a sustainable energy supply and bio-based chemicals is in full swing, the document notes.

Together, the logistics and industrial pillars of the port complex, i.e. the Global Hub and Europe’s Industrial Cluster, make up the port of the future. In 2030, the Global Hub will have the following characteristics:

1.   Global and intra-European freight flows: Rotterdam will be an important hub for freight flows from and to Europe and a key junction for cargo flows between other continents. This involves both existing freight flows, such as oil, petrochemical products, containers, coal and new products such as LNG, biomass and CO₂.

2.   Chain efficiency: The logistics chains that run via Rotterdam are the most efficient in the world. Collaboration and coordination between logistics players is of essential importance in this context.

3.   Sustainable hub: The Port of Rotterdam is part of logistics chains with the smallest ecological footprint per tonne-kilometre in the world. This can be achieved by sustainable modes of transport, clean fuels and efficient logistics chains.

4.   Integrated port network: The port is closely connected to logistics hubs found in the hinterland and to other seaports. Hubs in the hinterland will increasingly develop into gateways for the global hub.

5.   High-level activities in the region: Both the global hub and Europe’s industrial cluster generate a large number of jobs and business activities in the region, for example, by attracting business houses, logistics management organisations, industrial service providers, [maritime] maintenance companies, inspection services and [European] head offices.

Based on the vision, the success factors and the trends, developments and estimates for cargo throughput, crucial actions need to be taken.

Transition of the industrial sector

The European population is ageing, Europe has relatively small resources of fossil materials, and economies elsewhere in the world are growing at a far higher pace. However, the European market is mature, the document notes.

Fortunately, the industry in the Rhine-Scheldt Delta is an exception. Thanks to its favourable location for the supply of raw materials, major cluster advantages and economies of scale (companies use each other’s (residual) products), the industry in this area enjoys a solid competitive position.

However, further integration is needed, both between companies in Rotterdam itself and between the Antwerp and Rotterdam industrial sectors, to create greater economies of scale and cluster advantages for the companies in the Delta.

Connecting companies with pipelines will basically create one single large industrial cluster. This enables companies to produce more efficiently.

Efficient logistics chains in a European network

In the Netherlands and North-West Europe, a network of logistics hubs that are connected to Rotterdam via roads, rail and inland shipping need to be developed. Via such a network of inland hubs, cargo can be transported to its destination fast and efficiently. The inland hubs need to develop into gateways

for the port and Customs should be able to check the cargo at these locations.

Venlo and Duisburg already serve as important hubs for rail transport and inland shipping. Ultimately, the ambition is to realise a comprehensive European network of intermodal inland hubs.

Improving accessibility

Accessibility is crucial for the port. In many cases, improving accessibility does not solely come down to constructing extra infrastructure. It is important to better utilise the capacity of existing infrastructure. At the moment, there are regular tailbacks during rush hours, while at other times of the day, the roads are very quiet – particularly at night. To utilise the available infrastructure more efficiently, Rotterdam

needs to realise proactive traffic management for all modes of transport.

Improving the quality of life

In 20 years time the economic activity in the port area is expected to have increased by at least 150 per cent. All of this growth needs to be realised within environmental thresholds that will probably only become stricter in the years to come. Consequently, investments in measures that reduce noise and air pollution are needed. 

Innovation & decisiveness

In the future, the Netherlands will find it increasingly difficult to compete on the basis of traditional production factors. Knowledge promises to be the competitive factor of the future. It is needed to make targeted investments in the development and application of knowledge that will help to promote the traditionally strong sectors of the Dutch economy. Social innovation is an important component in this context, together with the renewal of legislation and regulations.

The pace of planning, decision-making and realisation needs to increase, among all parties involved. And the crucial actions for realising Port Vision 2030 are:

• For Europe’s industrial cluster:

-          Transition towards more bio-based (chemical) industry, increasing sustainable energy             production and carbon capture and storage of CO₂ (CCS)

-          Further integration and clustering of industrial activity, within Rotterdam and at the level         of Antwerp-Rotterdam

• For the global hub:

-          Substantial improvement of the efficiency of logistics chains

-          Improvement of the European transport network

• Improving accessibility:

-          Optimisation of the utilisation of existing infrastructure

-          Vigorous expansion of the road network with the missing links ‘Blankenburgtunnel’ and         ‘A4-South’

• For the improvement of the quality of life

-          Reducing noise and air pollution

-          Development of green zones between the port and the region

• Innovation & decisiveness

-          Besides technical innovation, more than anything else, each of these actions require social       innovation: decisiveness and organisational capacity are key concepts in this context

Three ports in the cluster are already working towards strengthening hinterland infrastructure. Recently, the port directors – Eddy Bruyninckx of Antwerp, Jens Meier of Hamburg and Hans Smits of Rotterdam – expressed their support in the European Parliament for further development of a European intermodal transport network. They said rail and inland navigation corridors, of which the three ports are the entry and end points of important corridors, are essential for European transport in the future. 

The three ports believe that the funds which the European Commission will make available should not merely be distributed “politically” among the 27 EU member states but invested in areas where the largest volumes of freight are concentrated – the corridors from the seaports into the hinterland.

Turning Bills Into Tools

Using warehousing receipts as negotiable instruments

For a developing economy like India, the establishment of credit flows is crucial to the success of the financial system. Warehouse receipts provide a marketing tool to the emerging private sector by reducing the role of government agencies in agricultural commercialisation and contributing to the creation of cash and forward markets.

by Radhika Rani G.

India is emerging as an important player in global trade. As consumption levels increase and commodity trading picks up pace, there is a dire need to meet the growing demand for an efficient supply chain capacity. Though the warehousing space in India is 1,800 million square feet, the share of organised warehousing is only 144 million square feet or just 8 per cent of the total.

At a juncture when Indian imports and exports gear up to meet the retail and utilisation demands the world over and when India requires a host of logistics hubs for its farm sector, it is time to evaluate the existing system. It is also time, as experts point out, for the industry to brace up for more capital flow in this key segment of supply chain management. “We need radical thinking to transform this sector and generate Rs 1,00,000 crore of investment as the warehousing sector requires such a capital,” exerts Capt Sanjeev Rishi, advisor to ICD Loni.

Also, as agri-logistics is yet to get its due in a farm-based economy such as India despite the government giving a fillip, it calls for more capital allocation from service providers. Private participation, says B B Pattanaik, CMD of Central Warehousing Corporation, is the need of the hour in building infrastructure and developing logistics hubs, more specifically storage capacities.

However, the farm sector is hardly aware of the changing dynamics in the commodities supply management. At best, they are familiar with godowns of the Food Corporation of India to stock their produce because Indian warehousing per se lacks quality, penetration and the much required spread. If more warehouses are needed as part of the penetration drive, more financing of warehouse receipts is required for transparency and buoyancy in trade. This initiative could well serve as a boon not just to farmers but also supply chain players, say experts.

Trade boon

Warehouse receipt, a seemingly familiar mechanism around the globe, simply implies bills used in futures markets to guarantee the quantity and quality of a particular commodity being stored within an approved facility. As per trade, they stand as a proof that settle expiring contracts and are often used when settling futures contracts of precious commodities. In short, they are a method of collateralising crops and lowering the risk to the lender, thereby lowering financing charges to the borrower.

In the light of the difficulties faced by farmers in obtaining finance for agriculture, warehouse receipt finance has emerged as an attractive alternative for farmers and processors in the developed world, say Nachiket Mor of ICICI Foundation and Dr Kshama Fernandes, researchers in the field. “Being negotiable instruments, these receipts can be traded, sold, swapped, used as collateral to support borrowing, or accepted for delivery against a derivative instrument such as a futures contract,” they explain.

Warehouse receipt financing, they say, has become a fairly mainstream method of financing in most industrialised countries and there is evidence that the overall efficiency of markets, particularly in the agribusiness sector, is greatly enhanced when producers and commercial entities can convert inventories of farm raw materials or finished products into a readily tradable device. It may be noted that warehouse receipts in the United States are deemed to enhance the presence of performance guarantees thereby improving the integrity of the warehouse system. They have been serving as negotiable instruments in managing and liquidating the huge grain inventories.

Commercial edge

As there are many corporates in the business of procuring agri-commodities on a large scale, the receipts can be of help to them, as the commodities stacked in the warehouses can be taken as collateral. By doing so, corporate companies can free themselves of blocking their capital during the time of procurement. The risk of loss of value of the collateral, say experts, can also be reduced by monitoring movement in the market value and using price risk management instruments.

As for farmers, the bills help them meet their immediate credit requirements. Also, the uncertainty of a reasonable remunerative price can be overcome as the rural producers can reap the advantage of their goods or a good crop stacked well in storage houses and also the benefits of higher price. The receipts can therefore lower the access barriers.

The system, say bankers, will help formalise trade transactions as a track record on farm activities can be put in place and genuine borrowers can be effectively screened without much delay. More importantly, the receipts enable banks to capitalise rural trade by reducing their monitoring costs and pepping up commercial lending to the farm sector.

And for companies trading in the futures market, a tripartite agreement reached by them with the bank and the farmer can help in buying commodities at a future price. In other words, the company can cover its risk by using commodity futures. Because conventionally, the corporates purchase raw materials upfront from farmers at the time of harvest and then place the stock in the warehouse. But following an understanding with the parties concerned, the bank can extend higher finance to the farmer against the warehouse receipt and eventually, the company’s payment is adjusted against the farmer’s loan and the surplus is credited to his savings account.

India infancy

However, warehouse receipts are yet to become a popular method of financing in India and the concern among trade pertains to a few institutional and structural shortcomings. Economists Richard Lacroix and Panos Varangis, who have been observing transition economies, point out three main inadequacies: 

• Lack of incentives for the development of a private storage industry owing to government intervention in agricultural markets – usually by setting support prices that take insufficient account of price variations over time or in different regions to allow for profitable storage;
• Lack of an appropriate legal, regulatory, and institutional environment to support a system of warehouse receipts; and
• Limited, if any, familiarity of the country’s commercial, including its banking, community with warehouse receipts.

These receipts are yet to be deemed as bankable assets by all financial institutions although three large public sector banks and one private sector bank have so far extended finance against them. And for the commodities market, identifying warehouses and creating infrastructure is a task in hand.

Although India has three electronic commodity exchanges – the National Commodities and Derivatives Exchange Ltd. (NCDEX), the Multi-Commodity Exchange Ltd. (MCX), Mumbai and the National Multi-Commodity Exchange Ltd. (NMCE), Ahmedabad, there is no specific platform for spot-trading thanks to the limited opportunity in disposing of physical commodities. Despite efforts being put by these exchanges in developing a physical infrastructure with the help of the Central Warehousing Corporation, a pronounced development of the commodities market can be ensured if the limitation of warehouses in a physical form can be overcome.

For instance, Shree Shubham Logistics has entered into a tie-up with the Union Bank of India for warehouse receipt financing solutions through which farmers can have access to credit without difficulty. According to the tie-up, Shubham will offer end-to-end solutions to the commodity stakeholders in agricultural and non-agricultural segment across India. The company will also be the service provider.

More recently, the State Bank of India extended its concessional interest loan offer to farmers till June 30 this year. As per the scheme, farmers can avail loans up to Rs 10 lakh against warehouse and cold storage receipts at a fixed interest rate of 8 per cent for the first 12 months in respect of loans sanctioned and disbursed till the end of June. In the second and third years, the interest will be 9 per cent and the rates will go back to floating from the fourth year, the bank says.

Similarly, HDFC Bank too launched a dual rate scheme, under which it offers a fixed rate of 8.25 per cent up to March 2011, then 9 per cent for the next one year and the prevailing floating rate for the remainder of the loan tenure.

Legal angle

If there are any drawbacks, they pertain to the legal framework in which the warehouse receipts system works. According to the Reserve Bank of India’s Working Group report, warehouse receipts, to work efficiently, require a recognised foundation in law ensuring that the ownership established by the receipts is not challenged. The receipts must therefore be functionally equivalent to stored commodities with well-defined rights, liabilities, and duties of each party, for example, a farmer, a bank, or a warehouseman.

The receipts, the report notes, must be freely transferable by delivery and endorsement and the receipt holder must be the first in line to receive the stored goods or their fungible equivalent on liquidation or default of the warehouse. A robust legal framework is a prerequisite to warehouse receipts being treated as secure collateral, the report adds.

Also essential is a warehouse infrastructure, grading and collateral management system that provides

guarantees on quality, quantity and storage of commodities, thus assuring that the quantities of goods stored match those specified by the warehouse receipt and also their quality is the same as stated on the receipt. This, says Nachiket Mor, will give farmers the confidence to store their produce and banks the comfort to accept warehouse receipts as secure collateral for financing agricultural inventories.

In addition, a special warehouse-receipt act could complete the legal foundation for an effective system of warehouse receipts, according to Richard Lacroix and Panos Varangis. “In order to work well, warehouse receipts need a recognised basis in law, so that the ownership established by the receipt is not challenged. Equally important are provisions for performance guarantees and the establishment of systems for warehouse inspection and crop-quality determination,” they add.

The need of the hour for farm-rich India is therefore to improve the efficiency of its agribusiness sector by helping producers and commercial entities to convert inventories into bankable devices. As reiterated, to sell, swap and serve should be the bottom line of these negotiable instruments.

                                                                     *****

What is a Warehouse Receipt?

 

It is a receipt used in futures markets to guarantee the quantity and quality of a particular commodity being stored within an approved facility. Rather than delivering the actual commodity, warehouse receipts are used to settle expiring futures contracts, says Investopedia. Also referred to as a vault receipt, they are most often used when settling futures contracts that have precious metals as their underlying commodities.

Key suggestions from/for trade:

• Need for a guarantee of return and a recurring income or assured business to the warehouse
• Warehousing receipts need to be traded at the national level with guaranteed payments
• Banks should be able to finance against warehousing receipts
• Warehousing receipts should be bankable assets
• All buyers and sellers to be nominated a particular warehouse in the designated area for giving and taking delivery, to help in providing recurring business to warehouses
• Spot exchanges to hire warehouses on a monthly rental which can assure monthly income for the latter
• Land prices for warehouses to be subsidised with waiver on stamp duty thereby reducing capital costs
• Easy loans with subsidised interest rates for setting up warehouses.

 Preconditions for viability

The legal system must support warehouse receipts as secure collateral. The pertinent legislation must meet several conditions:

• Warehouse receipts must be functionally equivalent to stored commodities
• The rights, liabilities, and duties of each party to a warehouse receipt (a farmer, a bank, or a warehouseman) must be clearly defined
• Warehouse receipts must be freely transferable by delivery and endorsement
• The holder of a warehouse receipt must be first in line to receive the stored goods or their fungible equivalent on liquidation or default of the warehouse; and
• The prospective recipient of a warehouse receipt should be able to determine, before acceptance, if there is a competing claim on the collateral underlying the receipt.

Operational conditions must be conducive to the creation of a warehouse receipt system and include the following:

• reliable warehouse certification, guaranteeing basic physical and financial standards
• the existence of independent determination and verification of the quantity and the quality of stored commodities, based on a national grading system; and
• the availability of property and casualty insurance.

 

Article published in Maritime Gateway, May 2010.