Port Financing: Opening Floodgates to India’s Golden Future
NEXGEN Financial Solutions Pvt. Ltd
PORT SECTOR – POSITIONING
Water and waterways have catalyzed the civilization and their geographical movements, since times immemorial. Economic prosperity near sea routes have been a regular feature of human growth. Trade and commerce have boomed with transportation and delivery of goods in a timely, cost effective and convenient manner. 90% of India’s trade (by volume) depends on water transport. Naturally Ports, Shipping Companies and their cost and quality effectiveness determine the success of India’s trade, commerce and industry in the international market place. A pro-development policy outlook, recognition and addressal of the bottlenecks for the growth of this sector, then assumes paramount importance to India’s economic progress. India’s long coast line of 7517 Kms, strategic location on the global trade map, robust economic growth outlook, cost competitive workforce, availability of natural resources are some of the natural advantages.
Ports in India are classified into two categories namely Major Ports and Minor Ports. “Major Port” means any port, which the central government may by notification in the official Gazette declare, or may under any law for the time being in force have declared to be a major port. Ports other than Major Ports are classified as “Minor Ports”. There are 13 Major Ports & 187 Minor/Intermediate Ports along the coast line of the country. (Details shown in the Figure 1 hereunder)
Figure 1: Major and Minor Ports in India
During 2010-11, the Major Ports handled 569.91 million tonnes (MT) equivalent to 65% of total traffic while the rest 35% was handled by Minor Ports
MAJOR CONSTRAINTS IN THE PORT & PORT LED GROWTH:
Ports in India are leading the countries growth in the international arena. India is constantly witnessing a significant growth in cargo traffic. However the sheer importance of this sector in the overall growth of India’s golden future is not diminished on any of the decision takers. Key constraints restraining the optimisation of India’s port sector growth remain:
Capacity constraint of major ports
4 out of 12 Major Ports are experiencing more than 100 per cent utilization namely Vizag, Tuticorin, Mormugao & Mumbai. Another 8 ports are also facing capacity utilisation constraints – being utilized more than the optimum accepted range of 70 to 75%. This clearly shows that there is an urgent need of capacity addition so that Indian ports can handle the increased cargo traffic in future. Further, the capacity utilization at non-major ports was 77 per cent in 2009-10. Figure 2 shows the capacity utilization of the major ports in India during 2009-10.
Long turnaround time & Questionable Productivity
The average turnaround time at the ports in India is between 2 to 5 days which is very high as compared to the ports in other countries like Hongkong and Singapore where turnaround time is between four to six hours. The cargo handling services at ports of India are inefficient as compared to the global ports. The low productivity rationale is also possible to understand from the study conducted by the Comptroller and Auditor General of India (CAG) in Feb 2010, highlighting that 55% of the equipments at Indian Ports are running beyond their rated economic lives, resulting in low utilization.
PORT FINANCING: THE CRITICAL SUCCESS FACTOR
Besides the above, financing remains a key issue constraining the ports development in India. This is deliberated in greater detail hereunder:
Investment Requirement till 2020:
Maritime Agenda 2020 has identified additional capacity requirement of 1293.56 million tonnes to be completed by 2020. This shall need an investment of Rs.167, 931 crores. Broadly, five areas of investments have been identified: These are detailed in the Table 1, below:
Sources of Funding:
The possible sources of funding for this Planned Investment are given in the Table 2 below
KEY CHALLENGES IN PORT FINANCING
- Asset-Liability Mismatch
Banks have remained in the forefront of the Infrastructure finance in India with a contribution of Rs. 2,70,000 crores of total Infrastructure financing as in 2010-11. This is further accentuated by the fact that other specialized Infrastructure Financing Bodies are yet to take the leadership in Port financing. The typical requirement of Port projects remains around 20 years (door to door). However, banks have an average deposit period not exceeding 2 to 3 years. This obviously restricts term lending of long duration and results in huge “Asset-Liability mismatch” for the banks.
On greater scrutiny it becomes more clear as the major source of bank’s ‘own funds’ availability is CASA (Current & Saving Account Deposits). Only a portion of this can be treated as ‘Long Term’. Further, “Term Lending” of this total “Long Term Deposit” is restricted to 20%. Thus, the available funds for long tenor port projects financing are getting constantly constrained.
- Absence of “Take Out” financing
Banks have led the initial risk period financing of the Infrastructure sector till now. However, in the absence of an efficient takeout mechanism their Sectoral Caps have been breached as even after the commissioning of the project, the Financed assets remain in the books of the initial lender.
Once the commissioning of the Infrastructure project is complete and it starts generating cash flows, it is expected that takeout lenders like IIFCL, IL & FS, IDFC or others may take over the asset and hold it for the long term tenor of the repayment of the loan. Further, this model has to remain as a WIN WIN model for the banks and takeout lenders such that both have the benefit of the qualitative and return producing financed assets. In the absence of an effective takeout finance, long term Port financing remain under threat.
Similarly, the Bond Market has not been catalyzed in India till date.
This continues to keep the chocked Infrastructure sectoral Caps at the banks under pressure without any option of releasing the “Cash Flow Producing Financed Asset” in the secondary market through a structured Bond product.
- Sectoral Caps
Port Sector Financing is included in the overall Infrastructure Sectoral Caps of the banks. The Infrastructure Sectoral Caps of most of the banks have already reached the brim – courtesy the huge volume & rush of “Power Sector projects”.
Even otherwise the available funds for Infrastructure financing are deeply curtailed due to the following reservations:
- 70% of the raised deposits only are lent by the banks due to the various Regulatory Norms (including regulated ratios like CRR, SLR etc.)
- Further, out of the total lendable funds 40% are allocated for ‘Priority Sector’ (which includes Agriculture, Small Scale etc.) – not available for Infrastructure lending till now.
- Lack of specialized Port Sector Lender
PFC, REC, IREDA & PTC Financial Services have contributed more than Rs. 1,50,000 Crore of Power sector Financing of the Country having raised money from domestic as well as foreign sources. However, India lacks a focused & specialized shipping sector financing body. This causes further constraints on the availability of funds for both Project financing and the working capital requirement of the shipping sector.
RECENT POLICY MEASURES BY GOVERNMENT OF INDIA
Government has already taken note of the importance of Port Financing. They have also taken certain steps to ensure the adequate availability of funds to the infrastructure sector. Some of them are outlined hereunder:
- Infrastructure Finance Companies
A new category of NBFC has been introduced to increase the lending in the Infrastructure sector. Also the credit exposure limit had been relaxed from 15% to 25% of the owned funds.
- Takeout Financing
Take out Financing scheme has been formulated that will directly help the banks to manage the asset – liability mismatch
- ECB Norms
ECB Norms have been simplified by the RBI thereby ensuring flow of more funds in the sector.
- Reduced Withholding Tax
GOI has also reduced withholding tax on FII investment in Infrastructure from 20% to 5% that would result in the greater participation of the FII through more investment in the infrastructure sector.
We have certain recommendations that may kindly be considered by Government of India and Government of Gujarat to further enhance the Port Sector Financing, same are summarized hereunder:
To Government of India
- Specialized sector focused Lenders
To catalyze the setting up of a specialized Port sector Financing Corporation. The main objective of such a financing corporation can be providing funds to Ports and Port led developments. Later the corporation and also can sponsor an equity fund for the purpose of equity funding to Major and Minor Ports and Port led development – in Public, Private & PPP Models. This can further catalyze the Port and Port related growth in the country. Ultimately, it shall result in more rapid economic growth in India.
- Accord “Priority Sector” status to Infrastructure
40% of the banks deposits are reserved for the priority sector lending. Therefore according the priority sector status to Infrastructure would make a lot of funds available to develop the Infrastructure in the country.
- Credit enhancement Mechanism
Credit enhancement mechanism should be created that would enable banks to manage capital constraints. Thereafter, banks can enhance credit at the end of the initial years. Like in US, increased off-take of infra bonds witnessed through credit enhancement mechanism.
- Standardization of bidding procedure
It would ensure the efficiency, predictability and single window approval, The PPP sponsoring agencies should utilize the available knowledge on best practices related to identification, development, procurement and contract management of the project.
To Government of Gujarat
- Govt. Of Gujarat may catalyze and seed the setting up of infrastructure Finance Company focused on Port & Port led growth in Gujarat. Further this corporation can be mandated to raise money both for Debt & Equity purpose from lenders and investors within & Outside India
- To create a special “Empowered Group of Ministers and Secretaries” to supervise the speed and quality of execution of the Port and Port related projects in Gujarat. This group of minister shall effectively debottleneck most of the Port and Port led projects. This is expected to further enhance the “Port investment” focus in Gujarat and enhance Gujarat’s attractiveness in the international investment arena.
Sanjeev Gupta is the Managing Director of NEXGEN Financial Solutions Pvt. Ltd (NEXGEN) (www.nexgenfin.com). NEXGEN is a SEBI Registered Merchant Banker focused on providing Financial Solutions to the Infrastructure Sector; with a deep focus on Gujarat’s Infrastructure sector financing. Besides, Mr Gupta is the Co–Chairman – 'Banking & Financial Services Committee', PHD Chamber of Commerce & Industry (PHD) & Senior Member- National Council on Banking & Finance, ASSOCHAM. Also he is the Member of the Working Group for "MSME Growth" structuring the 12th 5 Yr Plan (2012-17) constituted by the Planning Commission, Govt. of India.
He invites your Comments & deliberations on his email id: email@example.com