Move to landlord port model means privatizing state-run cargo berths
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If the Narendra Modi government is serious about transforming 11 of the 12 ports owned by the Indian government into landlord ports to run them more efficiently under a new law, it would be left with no choice but to privatize the cargo berths run by the state itself.
But this would be an extremely difficult choice for the government to make, given the strident opposition from port workers’ unions to such moves.
Shipping minister Nitin Gadkari says that the government will introduce the Major Port Authorities Act in Parliament’s winter session to govern the 11 ports.
Currently, these 11 ports function as trusts under a law framed more than five decades ago called the Major Port Trusts Act, 1963.
Kamarajar Port Ltd is the only exception. Kamarajar, which runs the port at Ennore near Chennai, was formed as a company under the Companies Act, 1956, when it was opened in 2001 and operates as a landlord port.
The 11 ports owned by the Indian government and run as trusts widely follow a hybrid format of the long obsolete service port model and the preferred landlord model of port management followed globally. This has resulted in a conflict of interest between the port trusts and the private sector, with the former acting both as port regulators and providers of commercial services in many instances.
In the service port model, the port authority owns the land and all available assets—fixed and mobile—and performs all regulatory and port functions. Here, the port trust is both the landlord and the cargo terminal operator.
While the service port model in India was consistent with a centralized economy, it does not fit well in a market-oriented economy, according to experts.
In the landlord port model, the publicly governed port authority acts as a regulatory body and as landlord while private companies carry out port operations—mainly cargo-handling activities. Here, the port authority maintains ownership of the port while the infrastructure is leased to private firms that provide and maintain their own superstructure and install own equipment to handle cargo. In return, the landlord port gets a share of the revenue from the private entity.
Currently, most major port trusts in India carry out terminal operations as well, resulting in a hybrid model of port governance.
The involvement of the port authorities in terminal operations leads to a conflict of interest and works against objectivity. The neutrality of the landlord port authority is a basic requirement for fair competition between port service providers, particularly the terminal operators. The role of the landlord port authority would be to carry out all public sector services and operations such as the award of bids for cargo terminals and dredging.
Privatizing cargo berths run by the state-owned ports themselves has, thus, become imperative for a successful transition to the landlord model of port governance, according to a recommendation made by the Indian Ports Association (IPA), a body representing the 12 ports.
This recommendation, as the saying goes, is like taking the bull by its horns.
Of the total 240 cargo berths operating at major ports (Union government-owned), 66 berths or 28% are on public-private partnership (PPP) model, while 174 berths are state-owned.
The PPP potential for the 174 state-owned berths can be gauged on parameters such as traffic projections/cargo growth for the next 10 years (until 2025), with berths registering steady cargo growth of more than 6% becoming preferred choices for privatization, the IPA has suggested in a report to the ministry.
Currently, 102 of the 174 state-owned berths load multiple or general cargo. To build financial returns, berths with dedicated cargo have a greater potential for PPP.
Besides, mechanized berths as well as berths with scope for mechanization have more potential for PPP since it ensures larger cargo handling and throughput.
Berths in ports with overall strong financials, for instance, with over 20% net profit, have a higher potential for PPP. This would be reassuring for prospective investors interested in higher returns, the IPA stated.
PPP cargo berths/terminals at major ports have so far been awarded through the revenue-sharing mode—the bidder willing to share the most from his annual revenue wins the deal—since these projects were viable on a stand-alone basis. About 10 cargo berths have the potential to undergo PPP through the revenue-sharing model, the IPA wrote in its report.
However some of the berths with potential for PPP may be constrained by revenue uncertainties. New models should be explored for such berths such as viability-gap funding, annuity and management contracts, it added.
The viability gap funding (VGF) model can be used if revenue from the berth is inadequate to service the capital expenditure. In such cases, a one-time VGF can be provided by the central government to make the PPP investment viable.
The annuity model can be used to remove traffic and revenue risk for PPP projects. In such cases, the port authority can pay a fixed semi-annual fee to the private operator to compensate him for capital cost and operational expenses, along with an assured percentage of returns.
The private developer, though, will not have the right to any charges levied on cargo. A variation of this is the hybrid annuity model wherein a 40% capital support is provided by the government and annuities are replaced by fixed cash flows to meet the cash outflows of the private developer.
If a state-owned cargo berth has no potential for PPP, it can enter into an operation and management (O&M) contract for operations management with O&M fees charged annually.
While there is a logical basis for privatizing the existing state-run cargo berths to facilitate the move to a landlord concept of port ownership, it is anybody’s guess how this will actually pan out.
P. Manoj looks at trends in the shipping industry.