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Business News/ Opinion / Online Views/  Migration policy for port operators tests government and companies
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Migration policy for port operators tests government and companies

The task of framing rules for enabling the existing terminals to migrate to the new regime looks complex

To be sure, the exercise is complicated because the existing terminals are operating under two different sets of guidelines—one framed in 2005 (80% of existing terminals follow this) and the other in 2008 that governs tariff determination. Photo: Mint (Mint)Premium
To be sure, the exercise is complicated because the existing terminals are operating under two different sets of guidelines—one framed in 2005 (80% of existing terminals follow this) and the other in 2008 that governs tariff determination. Photo: Mint
(Mint)

The act of framing guidelines on allowing cargo handlers to set market rates for new cargo contracts at India’s dozen state-owned ports was a challenging job in itself for the shipping ministry. But now the task of framing rules for enabling the existing terminals to migrate to the new regime announced on 31 July looks even more complex.

Ironically, it was a relentless campaign by existing private cargo terminal operating firms, including Singapore’s PSA International Pte Ltd, that led to the introduction of the new market-driven rate regime. They had pointed out to the ministry that a fundamentally flawed rate regime was one of the main reasons for the tardy flow of private funds into India’s ports sector of late.

But when it comes to rescuing themselves from potential doom—tariffs that systemically decline even as costs rise with each year of operations, given the way rates are worked out—they are confronted with a lack of consensus, which may derail the process.

A meeting called by the shipping ministry last week to discuss the terms of migration ended abruptly as participants put forth suggestions to suit their individual needs and requirements. This prompted the ministry to tell them to first forge a consensus among themselves and return with a common stand on the issue.

To be sure, the exercise is complicated because the existing terminals are operating under two different sets of guidelines—one framed in 2005 (80% of existing terminals follow this) and the other in 2008 that governs tariff determination. Even within the 2005 regime, there are terminals operating under different tariff models.

The port privatization policy that was followed until 2008 required the terminal operator, selected through a competitive bidding process, to share annual revenue with the government. The bidder willing to share the most from his annual revenue was awarded the contract, typically lasting 30 years.

Under the 2005 guideline, tariffs are set by the Tariff Authority for Major Ports (TAMP) after the cargo facility is constructed, usually by adding 16% to the actual costs. The tariff so set by TAMP on a cost-plus basis is generally revised every three years.

Under the 2008 regime, tariffs are set on a normative basis (factoring 16% return on capital) ahead of calling price bids for cargo handling projects. Here also, the highest revenue share offered was the sole criteria for award of contracts.

The upfront rate so set would remain valid for the entire duration of the 30-year contract. The tariffs, though, would rise every year, to account for rising prices because it is indexed to the Wholesale Price Index (WPI), a measure of costs, to the extent of 60%.

In the normative approach, tariffs will be worked out on the basis of certain defined criteria and assumptions on capital costs and operating expenses that are unrelated to the actual cost of the projects.

According to the rate regime announced in July for new projects, a port-wise reference/ceiling rate will be notified for various commodities. Such a reference/ceiling tariff will typically be the highest prevailing rate that was set on the basis of guidelines framed in 2008 for handling a particular commodity in a port.

In case no tariff has been fixed for a particular commodity in a port, or if the highest tariff fixed for a particular commodity in that port does not represent the project proposed to be developed, then the tariff fixed under the 2008 tariff guideline in any other port owned by the Indian government that is representative enough for that commodity will be the reference rate.

The reference/ceiling tariff so notified by TAMP will be indexed to WPI to the extent of 60% each year.

Over and above the WPI indexation, cargo handlers will be allowed to charge a maximum 15% more (termed a performance-linked tariff) than the indexed reference/ceiling rate, during each year of a 30-year port contract.

This will, however, depend upon them meeting certain performance standards prescribed by the regulator.

There is no confusion among cargo handlers operating under the 2005 and 2008 regimes on moving to the 2013 regime. But their biggest fear in migration is the notification of reference/ceiling rate.

For, at least in some cases, it will result in moving to a regime where the reference/ceiling rate (the rate to start with) is actually less than what they are currently charging their customers.

To solve this problem, they can take recourse to a clause in the new guideline, according to which, if the tariff determined for a particular commodity under 2008 guideline is not a representative reference tariff for that commodity, then the port can request TAMP to re-fix the reference tariff under 2008 guideline for the project giving sufficient justification.

But some of the existing terminals are against involving TAMP in determining the reference rate. While some others are skeptical of moving to the new regime wherein complying with performance standards to win a rate hike is considered impossible.

On its part, the ministry is only looking to move terminals operating under the 2005 guideline to the new regime, much to the annoyance of those coming under the 2008 norms.

In the case of terminals operating under the 2008 guideline, the rates are embedded in the contract, which says they will levy such and such rates for such and such services. A migration, in this case, would require re-working the contract. This will have to pass legal scrutiny.

In case of the 2005 regime, rates are not embedded in the contract, which says the operator will levy rates based on the guidelines applicable from time to time.

The exercise has already created a wedge in the Indian Private Ports and Terminals Association, threatening to split the private port lobby into two based on the guidelines they operate under.

The migration policy runs the risk of being labelled a scam because of commercial benefits accruing to terminals mid-way through the tenure of the contract. But then, it is a toss-up between throwing a lifeline to operators or letting the projects collapse due to unsustainable tariffs resulting in capacity cuts and reduced competition.

Not surprisingly, the ministry is playing it safe, indicating that the migration will need the approval of the cabinet to avoid allegations of granting undue benefits.

It will be interesting to see how the problem will be fixed by the government, taking everybody on board.

P. Manoj looks at trends in the shipping industry.

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Published: 26 Sep 2013, 11:52 PM IST
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