India’s state-owned ports size up benefits of raising dollar loans
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When state-owned Jawaharlal Nehru Port Trust (JNPT) recently signed an agreement to raise a dollar-denominated loan of $400 million from a consortium of Singapore’s DBS Bank Ltd and State Bank of India (SBI), it demolished an argument that the existing management structure of 11 of 12 government-owned ports doesn’t allow them to access cheaper external loans.
This was one of the main arguments put forth by the government since early 2000 to change the management structure of the 11 ports.
These 11 ports, also called major ports located in Chennai, Kochi, Navi Mumbai, Kandla, Kolkata, Mumbai, New Mangalore, Mormugao, Paradip, Thoothukudi and Visakhapatnam function as trusts under a law framed more than five decades ago called the Major Port Trusts (MPT) Act 1963.
Kamarajar Port Ltd is the only exception. Kamarajar, which runs the port at Ennore near Chennai, was formed as a firm under the Companies Act 1956 when it was opened in 2001.
Under the restrictive ambit of the MPT Act, the major ports are finding it difficult to operate in a highly competitive environment and respond to market challenges, according to India’s shipping ministry.
This argument was also used to explain, among other things, why major ports were underperforming when compared with their private-sector counterparts.
The fact is that none of the major ports, including a corporate port such as Kamarajar, attempted to raise external commercial borrowings in the past, though some of them did take loans from the domestic market.
It was Nitin Gadkari, India’s shipping minister, who showed that this can be done.
Gadkari argued that the dozen ports can use their dollar earnings to borrow money at cheaper rates from overseas, instead of availing high-cost rupee loans at interest rates of 12-14% from the domestic market.
The plan was first put to test for a road widening project linking JN Port for faster evacuation of cargo.
Six banks—ICICI Bank Ltd, EXIM Bank, Deutsche Bank AG, Citibank NA, DBS Bank and SBI—had also submitted quotations for the loan to be split in two tranches with tenures of seven-and-a-half years and 10 years.
The mandate was finally given to SBI and DBS Bank. JN Port will raise $300 million from SBI and $100 million from DBS at rates under 4%. JN Port will service the loan from its dollar earnings.
However, there is a small hitch here.
Vessel-related charges, or so-called marine charges, such as port dues, berth hire and pilotage, are paid by ships calling at a port. Vessel-related charges for foreign-going vessels are denominated in dollars, but collected in rupees after applying the prevailing exchange rate, according to a practice followed since 1991.
Cargo-related charges at ports such as wharfage, crane hire, storage, warehouse, demurrage and estate rentals are denominated and collected in rupees.
JN Port has sought approval from the government and the Reserve Bank of India to also collect the vessel-related charges in dollars during the loan repayment period to hedge against fluctuations in exchange rates.
JN Port’s success in raising a dollar-denominated loan could prod other major ports to look at this avenue to raise cheaper funds for expansion. Cheaper loans will improve the viability of projects and fetch better returns.
The major ports have been increasingly losing market share to new-generation private ports. In the year ended March 2016, the 12 ports loaded 606.374 million tonnes (mt) of cargo, accounting for about 55% of India’s external trade by volume shipped by sea.
The dollar loan borrowed by JN Port also goes to show that operational improvements and competitiveness can be brought about without changing the structure if there is political will and support from port workers. In fact, this has already started manifesting itself. The combined operating income of the major ports rose 8% from Rs.10,190 crore in 2014-15 to Rs.10,961 crore in 2015-16. Their operating surplus rose 19% from Rs.3,593 crore in 2014-15 to Rs.4,268 crore in 2015-16. Operating margin increased from 35% in 2014-15 to 39% in 2015-16. The profit margin of the 12 ports improved from 27% during 2013-14 to 39% in 2015-16.
The improvement is due to an overall reduction in the average turnaround time of ships (time taken by ships to berth, unload cargo and sail off) calling at the major ports. In ports such as Paradip, V.O. Chidambaranar and Visakhapatnam, the average turnaround time was cut by over 40%.
These operational efficiencies and improvements can be used as a bargaining tool by port workers to stall a government plan to undertake structural reform of the major port trusts and convert them into companies. The plan involves bringing the 11 port trusts under a new law called the ‘Major Port Authorities Act’, which will have provisions to undertake this task.
P. Manoj looks at trends in the shipping industry.