Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online Views/  India looks to clean up port tariff mess
BackBack

India looks to clean up port tariff mess

With many port tenders collapsing for lack of bidder interest and with some firms walking away without implementing projects after getting contracts, the govt has realized the time has come to free rates at major ports

With private ports eating into their share, Indian government ports themselves have been seeking similar freedom to set rates. Photo: Hemant Mishra/Mint (Hemant Mishra/Mint)Premium
With private ports eating into their share, Indian government ports themselves have been seeking similar freedom to set rates. Photo: Hemant Mishra/Mint
(Hemant Mishra/Mint)

The long-winded debate on deregulating rates at the dozen ports controlled by the Indian government and restoring investor confidence in the country’s port sector has reached the final stages.

On 8 March, India’s shipping ministry published draft guidelines seeking comments from stakeholders on setting market-based port tariffs. However, the new norms, if and when notified, will be applicable only to new port projects.

A market-linked tariff regime at Indian government-owned ports is long overdue because there is sufficient competition in the market to warrant such a shift. The insignificant cost of cargo handling at ports (less than 3% of the overall logistics costs) and the lack of a level playing field in the ports sector only lends weight to the argument that rates should be deregulated.

India has two categories of ports—those that are regulated and those that are not. In the first category are the 12 ports, or so-called major ports, owned by the Indian government. Again, in this category, there are cargo terminals operating under two different tariff regimes—one that was framed in 2005 and another in 2008.

Currently, the rates for cargo-handling services provided by the Indian government ports and the private firms running cargo terminals there are set by the Tariff Authority for Major Ports (TAMP). There are several lacunae in the tariff regime of 2005, the main ones being that operational efficiency is penalized. This means, if a terminal loads more than the projected cargo volumes, it will lead to a reduction in rates in the next tariff revision exercise.

The 2005 tariff norms allow only 50% of the efficiency gains (revenue) accruing from handling higher cargo volumes to be retained by the terminal operator. The balance 50% is passed on to the customers (shipping lines) in the form of lower terminal rates. To reduce losses, cargo-handlers have resorted to loading lesser quantum of cargo, hurting India’s external trade.

Yet another unique feature of India’s port tariff regulation is that it regulates rates in a business-to-business (B2B) set-up where the users are not directly involved as in the electricity and telecom sectors.

Thus, the current tariff regulatory regime benefits shipping lines, the only customers of the cargo terminals, as there is no mechanism to ensure that the benefits of lower rates ordered by TAMP are passed on by the carriers to exporters/importers.

The 2008 tariff norms are a vast improvement on the 2005 regime, but their efficacy is yet to be tested. Very few projects have been offered for bids under this format and those that have are yet to start operations.

In the second category are ports owned by the governments of states such as Gujarat, Andhra Pradesh, Maharashtra, Orissa, Tamil Nadu, among others. These states have given their ports, referred to as non-major ports, to private firms for development and operations, thus creating new-generation maritime gateways such as Mundra, Pipavav, Gangavaram, Krishnapatnam and Dhamra, among others.

India’s shipping minister G.K. Vasan said on 15 April that ports outside the control of the Union government now load 42% of India’s total export-import cargo shipped through its ports. The share of non-major ports used to be hardly 5% a few years ago.

The success of these private ports goes to show that the deregulated tariff model works best.

With private ports eating into their share, Indian government ports themselves have been seeking similar freedom to set rates.

Tariff regulatory risks are perceived as a big hurdle to investing in port terminals at major ports. This has forced many local and foreign port investors to shy away from participating in Indian port tenders of late, notwithstanding a weak global scenario.

With many port tenders collapsing for lack of bidder interest and with some firms even walking away without implementing the project after getting the contract, the shipping ministry has realized that the time has now come to free rates at major ports to achieve a decent success rate in augmenting India’s port capacity to 3.2 billion tonnes with an investment of 3 trillion by 2020.

But while the new guidelines seek to move towards a market-linked tariff approach and attract investors, the process outlined for setting the actual tariff goes back to the system of TAMP control.

According to the new plan, TAMP will first notify a port-wise reference rate for various commodities. Such a reference tariff will typically be the highest prevailing rate for handling a particular commodity in a port. Cargo handlers will be free to set tariffs for the services that may be higher or lower than the reference rate. But if the actual rate to be levied is higher than the reference tariff, the same has to be referred to TAMP, which will have the powers to modify the rate based on feedback from port customers.

This key clause in the new guidelines, if implemented, will dilute the very essence of setting rates based on market forces. If the intention behind the market-linked tariff approach is to work in its true spirit, this clause needs to be removed. Once the reference tariff is set, determining the market-driven rates should be left to the cargo handlers without any conditions. This will make the new guidelines acceptable to investors and lenders.

Once this issue is fixed, the shipping ministry needs to take a serious look at what to do with cargo terminals operating under the existing restrictive tariff framework of 2005.

The existing tariff norms have become a sticky issue between the government and port investors, with several tariff-related cases being heard by the courts.

One option could be to bring the existing cargo terminals also under the new regime and put everybody on par.

But a government battered by allegations of corruption from all sides would be averse to taking such a call mainly because it will require re-working key contract terms, exposing it to fresh accusations of granting undue financial favours to private port investors after the projects started operations.

These investors were fully aware of the risks involved while putting their winning bids. Will the government bell the cat? Let’s wait and watch.

P. Manoj looks at trends in the shipping industry.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 25 Apr 2013, 10:13 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App