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.