Shipping ministry seeks to give greater flexibility in port concession pacts

The shipping ministry will allow private developers to extend concession period for port contracts if the traffic demand is lower than forecast due to regulatory changes


Around 400 projects have been identified under the Sagarmala programme for port-led development, requiring an investment of about Rs4.5 lakh crore.
Around 400 projects have been identified under the Sagarmala programme for port-led development, requiring an investment of about Rs4.5 lakh crore.

Bangalore: The shipping ministry is weighing a plan to extend or reduce the concession period for port contracts to deal with cargo volatilities and balance risks better as it seeks to shore up investor sentiment in a sector roiled by sluggish global trade.

The plan, to be incorporated in a new so-called model concession agreement (MCA) written by the ministry for port contracts at Union government-owned ports, will allow private developers to extend the concession period (typically stretching 30 years) if the traffic demand is lower than forecast due to regulatory changes. 

A concession agreement sets out the terms and conditions of a port contract. 

Around 400 projects have been identified under the Sagarmala programme for port-led development, requiring an investment of about Rs.4.5 lakh crore. 

Volatility in cargo handled is a key issue that impacts the viability of projects, said a Mumbai-based port consultant. The MCA currently followed by Union government ports while awarding port projects do not provide for such cargo volatilities and the traffic risk is borne fully by the private developer. 

Henceforth, if the actual average traffic for 15 years from start of commercial operations falls short of the target traffic by more than 20%, then for every slab of 2% shortfall above the threshold of 20%, the concession period shall be increased by one year. Such increases, though, will be restricted to 10 years overall. The target traffic will be equivalent to 70% of the capacity of the project. 

For instance, in the event of a shortfall of 25% in target traffic, the concession period will be increased by two years. 

On the other hand, if the actual average traffic for 15 years exceeds the target traffic, then for every slab of 2% excess above the threshold of 20%, the concession period shall be reduced by one year and such reduction will be capped at three years overall. 

However, the private developer can avoid reduction in concession period by opting to pay a further premium equal to 10% of the gross revenue in the respective years. Port contracts are decided on the basis of revenue share – the entity willing to share the most from its annual revenue will get the deal. 

The new MCA seeks to introduce the minimum guaranteed revenue concept in place of the existing minimum guaranteed cargo. A private developer is currently bound by the minimum guaranteed cargo prescribed by the MCA and a default can trigger termination of the contract. 

However, port investors have contended that the minimum cargo levels may not be achieved due to a variety of reasons including those beyond their control. 

The minimum guaranteed revenue will be revised every year to account for variation in the wholesale price index, a measure of costs, to the extent of 60%. If minimum revenue is not achieved in any year, the port authority can use idle capacity as it deems fit. 

The revenue share payable by the private developer to the port authority will be computed on the basis of the maximum rate levied from users ignoring the discounts offered, according to current rules. However, if the discount offered to users is more than 10% of the ceiling rate, the private developer will be allowed to pay revenue share on the discounted tariff with the approval of the port authority, according to the new plan. 

The original promoters of the project should hold 51% of the equity for three years after start of commercial operations, 26% equity for another three years and thereafter exit the project completely. The promoters, however, can exit the project earlier by seeking a waiver of the 26% equity holding requirement from the port authority subject to achievement of performance parameters during the three years after commercial operations. 

In the existing MCA, the promoters have to hold 51% equity for three years after commercial operations and 26% stake during the balance period of concession. 

In the new MCA, the port authority will agree not to set up competing facilities until the earlier of three years (five years in the current MCA) from the completion of the cargo handling project or the average annual volume of cargo handled at the facility reach 70% of the project capacity for two consecutive years (75% in the existing MCA). 

“Permitting greater amendments to the concession agreements can ease challenges affecting public-private-partnership (PPP) performance. Amendments are currently allowed in only a few limited cases, such as “change in law” or “force majeure”. The private developer is more liable for risk than the port authority. The government needs to introduce mechanisms to better balance out this risk between stakeholders,” said the port consultant mentioned earlier.

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