Industry Ponders

Mr. Anurag Garg
Associate Vice President
Business Development
Adani Ports & SEZ Ltd.

In the backdrop of recent debate on pricing of natural resources in India, this article intends to capture the pros and cons of various concession / License regimes prevalent in the country for port sector. The waterfront of this country (all 7500 Kms of it) is essentially a sovereign property and the development of same by private sector requires transfer of these rights to private player.

The concession or license agreement, (for cargo handling facilities) provides a formal framework for this transfer. Inter alia, it ensures that developer submits a waterfront development plan which is approved by government authority prior to development thus ensuring that a developer cannot develop the waterfront in any arbitrary manner. The concession agreement also permits construction only after developer / state procures environment

clearance for project. After commencement of the construction, developer has to complete it in a stipulated time period else pay penalty for the delay. Another salient feature of concession is that land for port development is leased to the developer by the state. This ensures that at the end of concession period, when the assets are transferred back to government, there are no leakages, as land on which assets are developed automatically reverts to government. These features are common to all concessions, in major or minor port, with some small variations.

What is interesting to note is that the license payout to government, differs widely from state to state.

In the Major ports, operating under jurisdiction of central government, there have been various license payout regimes for the terminal, which includes a berth & back up area. As far as the potential bidders are concerned, this is a low risk business because of the following reasons (Not exhaustive)

• The supporting infrastructure like rail and road, customs and CHA’s are already in place.
• Marine infrastructure like breakwater and dredged channel are already present.
• The trade ecosystem in terms of stevedores, vessel agents, shipping lines are already familiar with the port facilities.
• Trained and skilled manpower is available as major ports have been in existence for a long time and urban clusters have developed around them.

The first concession for a terminal in Major port was signed between P&O ports (Australia) and JNPT in 1998. The terminal, now called NSICT, (Nhava Sheva International Container Terminal) pays a license fees on per TEU basis to the port. The PSA terminal in Tuticorin is also modelled along the same lines. The Rs / TEU value paid to the port was actually fixed by bidder himself while bidding. Subsequently all other bids including P&O Ports Chennai (now DPW), PSA Chennai & APM Terminals, JNPT were bid out on revenue sharing basis, wherein the party quoting highest revenue share was granted concession. The revenue in turn, depends on the tariff fixed by the regulator i.e. Tariff Authority of Major Ports, (TAMP) and is reset every few years. The terminal operator also has to ensure a minimum guaranteed throughput. It may be noted that earning of a major port from the terminal operator is typically under following heads:

• Licensee Fees ( revenue share)
• Land lease rental
• Marine dues (port dues, pilotage & Berth Hire)

In 2008, the revenue share regime was modified wherein the tariff was set by TAMP on an upfront basis for 30 years instead of earlier regime wherein TAMP set tariff every 3 – 4 years. The bidder still has to quote revenue share while bidding and the party quoting highest revenue share is awarded the concession. In this regime, Major ports do not collect berth hire charges. All other revenue streams remain unchanged.

In minor ports, coming under the purview of respective state government, there are essentially two distinct regimes for license fees payment. In Gujarat and Maharashtra, the license fees are on Rs / MT of cargo handled basis with predetermined escalation at regular interval. On the other hand, states like Orissa & Andhra have revenue share regime. Union territory of Pondicherry also follows the revenue share regime.

The table below lists out the various license fees regimes across coastal states. It is worthwhile to note that unlike major ports, the concession in minor ports are typically for entire Greenfield port development which includes development of berths, backup area, rail and road connectivity and social infrastructure. Hence, on a like to like basis, the minor port development carries with itself high risk in terms of upfront costs and time required to create a trade ecosystem. This perhaps explains as to why the revenue share for terminal in major ports is pegged at 30 – 40% but for minor ports they hardly exceed 5%. Also unlike Major ports, the revenue stream for the state / maritime board only includes revenue share and land leased rental as marine activities and day to day conservancy functions are provided by the developer and not by the state.

Table 1: Comparative Concession Fees Regimes across Minor Ports

Each of the license regime has its pros and cons and since private port / terminal development is only 12 year old phenomenon, our understanding of these pros and cons is not deep enough. A comparative of concession regime on three key parameters is as indicated below:

Table 2: Comparative of various Concession Fees Regime

Reliability of Government revenue: is much higher in case of Per MT regime as the cargo loaded / unloaded in the port, is also monitored by customs and hence waterfront license payment is easy to assess. In case of Major ports, with tariff ceiling being fixed and terminal involved in only cargo handling activities, the revenue share assessment is reliable. Further the terminal is operated by SPV which cannot have any other business and hence the accounting records are easy to audit by the Major port. In case of revenue share system of minor ports, accounting records are complex as the minor port developer provides number of services in the port including marine, cargo handling, bunkering etc and can structure the contracts to limit his revenues in the port company. In such cases it becomes imperative that authorities compare the revenue share of 2-3 ports operating in the region and benchmark per MT revenue so that chances of leakages through contact structuring is minimized.

Risk Sharing: The second aspect relates to risk sharing. Ideally, revenue share regime should be equitable in terms of risk sharing between the state and the developer. However in major ports, the minimum throughput guarantee cargo provision skews the risk matrix in favour of Major port i.e. major ports have less risk then the terminal developer. In the per MT concession fees regime, the risk sharing is uneven as the royalty escalates in a pre-determined manner every few years. Market forces ensure that developer cannot pass on this increased cost year on year to the trade.

Incentive for developer to keep investing: The third parameter relates to the incentives to the developer to continue to invest in creating new assets. In Major port, typically the terminal investment happens only once and hence revenue share regime has no impact on CAPEX. In case of minor ports, with increasing licensee fees on per MT basis, the developer will invest in new assets only if he is confident of market / trade absorbing the enhanced fees. The developer in revenue sharing regime does not face this constraint.

Tariff Setting Freedom: The tariff regulation is governed by TAMP in case of major ports which takes away the freedom from the developer to set the tariff for his terminal. Hence, concept like ‘intra port competition’ is unheard of in case of major ports in India. In case of minor ports with Rs/MT regime, Gujarat offers the developers with tariff setting freedom which works as a huge incentive for the developers to invest in such projects.

Is there an Ideal Way?

There are pros and cons of various concession regimes and none of them is ideal. However, irrespective of license fees issue, minor port development attracts industries to set up base near the port, which leads to Industrialization of the entire region with positive socio-economic spinoffs. Hence the license fee regime, whether on revenue share basis or per MT basis, should have flexibility to ensure that development of the region continues apace and hence from time to time the regime should be reviewed and modified. In short, minor ports development should be looked upon as a catalyst for growth of the region and not from the perspective of revenue maximization.

[Views in this article are personal views of the author and do not represent views of GMB or APSEZ.]

Mr Anurag Garg is currently Associate Vice President-Business development for Adani ports and SEZ. He has more than 13 years experience in ports business. He is an alumnus of IIT Roorkee and IIM Kozhikode. Mr. Garg has overall 18 years of work experience across sectors and companies.