Mumbai: The Union government’s plan to fix tariffs upfront and then invite bids for awarding cargo handling projects at the country’s 12 state-owned major ports has drawn flak from analysts and experts who claim this model completely overlooks what customers are willing to pay for. “Nobody sets tariffs upfront in other business. Where is the role of the customer in all this if the tariffs are fixed upfront?” asked D.T. Joseph, India’s former shipping secretary.
Drawing flak:A view of the Mumbai port. The Union government’s plans to fix tariffs upfront and invite bids for awarding cargo handling projects at the 12 major ports have drawn criticism.
Currently, tariffs are fixed on a cost-plus model after winning bids are chosen. Under the new plan, the tariffs will be fixed by the Tariff Authority for Major Ports (TAMP) on the basis of an estimate of capital and operating costs of building and operating a cargo handling terminal of a particular capacity.
The tariffs will also include a 16% return on capital. The upfront tariff thus fixed will be mentioned in the bid documents.
According to Joseph, this is very different from the tariff setting mechanism in other sectors where the quality of facilities and the level of service determines the price customers pay.
He said there is a better way to structure the projects. The new plan envisages tariffs being decided before the price bids, and winning bidders being selected on the basis of the revenues they are willing to share with the government (the company willing to share the most gets the project).
“Instead of fixing tariffs upfront and bringing revenue share through the back door to select the winning bidder, whoever is quoting the lowest tariff should get the contract,” Joseph said.
The government’s plans to reword the tariff setting mechanism were prompted by a desire to improve efficiency and reduce handling costs at ports — the cost-plus model has not provided companies the requisite incentive to do this. An official at the shipping ministry, who did not wish to be identified, said that it has been known to promote padding of costs.
Joseph was shipping secretary between June 2003 and December 2005 and it was during this time that the government decided not to allow companies to include the revenue share they were giving as part of their costs. “This would escalate tariffs. Why should the users pay for something that is given by the private operator to the port as part of the agreement? I did not want this to happen and burden the users,” said Joseph.
Following the discontinuation of this practice, which was followed in the first few years of India’s port privatization project that began in 1997, the private operators complained that their revenues and profits were badly hit, forcing the government to relook the tariff setting mechanism.
However, some experts agree with Joseph in saying that new pricing model has its share of faults. That’s because, while the government will fix the tariffs upfront for the entire contract period (30 years in most cases), it will also allow the companies to increase them every year to account for inflation.
The rates will be linked to the Wholesale Price Index (WPI) to the measure of 60%, which means that a 5% increase in WPI will result in a 3% increase in the tariff.
That doesn’t seem right because “tariffs are getting reduced with the present guidelines after accounting for depreciation,” said an official at Jawaharlal Nehru Port, who did not want to be identified.
The capital cost incurred by the company setting up the terminal is written off, or depreciated over a period of time, increasing profitability and reducing notional costs over the same period. “Typically, rates should go down if the traffic levels increase and port operating assets get depreciated,” this official said.
And though the new guidelines provide for “reviewing tariff fixed upfront once in five years to adjust for any extraordinary events that could not have been seen by a prudent person,” this may not be easy, the official said.
“Tariff reviews are always challenged in courts by the operators. It becomes a tool for not doing it,” added the port official.
The new guidelines are aimed at creating adequate port capacity and promote competition. About 95% of India’s trade by volume and 70% by value is shipped trough the sea route.
The government plans to modernize and upgrade cargo handling terminals at the major ports over the next five years to raise port capacities from 508 million tonnes (mt) a year to over 1,000 mt a year by 2011-12.
This is expected to cost around Rs 50,000 crore and the government hopes to attract private investment for the entire amount.