India’s shipping ministry did the right thing by scrapping the auction system for selling permits to stevedores and shore-handling agents on a revenue share model to operate at state-owned ports in a new policy unveiled last week.
The auction method of picking stevedores and shore-handling agents was introduced only in August last year. The revenue share had to be discovered through auction from within a ceiling rate allowed to be collected by stevedores and shore-handling agents from exporters and importers. The ceiling rate would be set by the Tariff Authority for Major Ports (TAMP), the rate regulator for the Union government ports.
Consequently, the highest revenue share price determined through auction will have to be matched by all other eligible stevedores/shore-handling agents currently operating in these ports to be allowed to hold permits for work.
Prior to August 2015, these entities bought permits from port authorities for a three-year period after paying a fee ranging from Rs.4,000 to Rs.1 lakh, depending on the port. On an average, there are at least 50-80 licensed stevedores operating at each of these ports.
After issuing licences, the port authorities had no role to play in their functioning because the stevedores are engaged directly by the exporters and importers based on competitive rate quotations to load and unload cargo from non-public-private partnership (PPP) berths. They are paid by the exporters and importers who hire them but none of this money is shared with the port, which invests the money in constructing berths and erecting cargo-handling gear, by way of royalty or revenue share as in the case of PPP projects, triggering complaints that the ports were losing money because of the way the licences were sold. It also led to demands for selling permits on the basis of revenue share.
The ministry soon realized that the auction model based on revenue share didn’t fit into its goal of promoting competition, reducing cargo-handling costs and increasing revenue. For one, there was no motivation for bidders to quote a high revenue share when they always had the option to match the highest price bid and take a work permit.
In an auction system like this, the licence should typically be given to the entity putting the highest price bid or a limited number of entities at the same rate. When there are no limits on the number of entities, why would somebody quote anything more than the reserve price?
Suppose the government auction document says the minimum bid price is 2% of the ceiling rate, why would anybody quote even one paisa more than the 2% to get a licence? On the contrary, if the unsuccessful bidders decide not to match the highest bid or only some of them did, it would have led to a monopolistic situation, defeating the purpose of widening competition and reducing logistics costs.
In the new policy, the ministry has asked each port to fix a cargo-wise royalty on a per-tonne basis to be charged from stevedores and shore-handling agents. Apart from bringing revenue to the port, the royalty can be used as a marketing tool to attract cargo by increasing or lowering the rates, keeping in view competition from neighbouring ports.
However, where the ministry has erred is in setting uniform performance parameters for stevedores and shore-handling agents without creating the necessary infrastructure to help achieve them.
Secondly, the ministry has said that the ceiling rates to be set by TAMP will be based on the normative approach, wherein the tariffs are worked out on the basis of certain defined criteria and assumptions on capital costs and operating expenses that are unrelated to the actual cost.
There are at least 10 variables that affect performance when handling cargo from a conventional berth.
For instance, coal unloading productivity varies for reasons such as depth and back-up area for storing cargo. Another key variable is the ship itself. The vessel could be geared (with cargo-handling gear on board) or gearless. If geared, then the variables depend on the capacity of the ship cranes, the age of the ship, the performance of the cranes, the capacity of the grabs, the quality of the grabs, the cycle time of the cranes and so on. Each of these will have a bearing on the productivity and, consequently, the operational costs.
Besides, the plots allotted for storage could be near or far, may have a railway track on the way from ship to plot or may not.
In some ports, railway lines run all over the place, holding up cargo-laden trucks when cargo trains pass, hurting performance.
These factors will also determine costs. The cost of lease rent may vary from plot to plot.
How will TAMP reconcile all these factors while setting normative rates? If TAMP resorts to averaging any of the above factors, the normative tariff fixed would not serve any real purpose.
Currently, all Union government ports, some of whom are operating for many decades, are pursuing modernization of cargo-handling activities. Once the modernization is completed at all ports, dry bulk cargo will only be unloaded with harbour mobile cranes (HMCs) erected at the berths. The plots are being reorganized without much of a difference between them. When that happens, all the above factors become irrelevant and it would be able to fix meaningful normative tariffs.
Suffice to say, the current performance norms vary drastically from berth to berth and from vessel to vessel.
The unreasonable and impractical performance standards set by the ministry brings the spotlight on global consultants, whose recommendations formed the basis of the new policy.
These consultants did not interact with stevedores and shore-handling agents, some of whom have decades of field experience, ahead of submitting their recommendations. They have only gathered past data from ports, applied fancy modern algorithms and proposed performance parameters and penalties for non-performance. The whole exercise will only lead to additional revenue to the port through collection of penalties and will not improve productivity. The consultants should have interacted with the stakeholders, understood the impediments and reasons for the present level of performance, suggested corrective measures and then set performance targets.
That’s when experts bring real value to the table; not merely to set targets.
Performance norms and penalties linked to non-compliance are used by most international ports to improve overall productivity of operations, according to the shipping ministry.
A guideline for the calculation of performance norms for different commodities, taking into account the infrastructure available, is important for enabling ports to use performance norms as a key lever to drive productivity improvement across ports, it said.
P. Manoj looks at trends in the shipping industry.