BackGovernment-owned port trusts win back flexibility to set rates
CEOs of the port trusts will have to ensure that the flexibility to set rates would not lead to a loss of traffic
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Bengaluru: Each of the trusts that run 12 of the 13 ports owned by the Union government will have flexibility to set rates based on market forces, according to a new tariff policy for these harbours approved by the shipping ministry on Tuesday.
But this flexibility comes with an onerous responsibility on the chief executives of these ports. They will have to ensure that the flexibility to set rates would not lead to “loss of traffic".
In other words, these ports can play around with the rates subject to what the market can bear as long as it does not lead to diversion of cargo to a nearby port due to higher rates.
“The major port trusts urgently needed the flexibility to stand up to competition from private ports," said a Mumbai-based port consultant. He did not want to be named.
“But, they can’t arbitrarily increase rates with the help of the new policy. They have to be judicious in their flexibility. Because, private ports are charging much more than the public ports. Yet, port users are willing to pay the higher rates due to better performance of these ports. Port trusts cannot have higher rates with the existing performance that they get out-competed," he added.
From a position of monopoly till the late 1990s, the share of cargo handled by these ports have tumbled to 58%, mainly after states started building ports with private funds without any regulatory restrictions, particularly on rates.
Each of the 12 port trusts will now be allowed to set rates for different services to the extent needed for meeting their annual revenue requirement (ARR).
The ARR (a cap) will be the average of actual expenditure for the past three years plus 16% return on capital employed that includes capital work in progress, according to the new tariff policy.
“Based on the ARR, major port trusts will have the flexibility to determine rates to respond to market forces on its commercial judgement within the ceiling of ARR," according to the new policy, a copy of which has been reviewed by Mint.
“While changing the rates, the major port trusts will have to ensure that there will not be loss of traffic. The responsibility of ensuring this would rest with the chairmen of the major port trusts," the shipping ministry wrote in the new policy.
The rates so set by the trusts will be valid for three years and will be automatically fully indexed to the Wholesale Price Index (WPI), a measure of costs, every year. However, the annual indexation of rates to WPI will be linked to achievement of performance standards committed by the port trusts. “If a port trust does not fulfil the performance standard, no indexation would be allowed during the subsequent year".
The market conditions for provision of port services, the ministry said, have undergone significant changes since liberalization in the port sector and expansion of port infrastructure, following the introduction of public-private partnerships at major ports (owned by Union government) since 1996.
“Non-major ports (owned by the states) have expanded rapidly and now have a substantial presence, which accounts for about 42% of the cargo share (of India’s external trade shipped by sea route). Further, there is no parity in the regulatory mechanism between the major port trusts and the non-major ports. Whilst tariffs of major port trusts are regulated following cost-plus-return approach, non-major ports are not covered by any tariff regulation. A need is, therefore, felt to give flexibility to the major port trusts to react to the market forces and also to encourage them for better performance," a spokesman for the shipping ministry said.
The ports trusts have been struggling to get rate hikes from the tariff regulator mainly due to the inflexible guideline for drawing up the tariff.
The new tariff policy forms part of an overall plan to migrate the rate regime for existing services that are governed by the 2005 guideline to the market-linked rate regime announced in July 2013 for cargo handling projects given to private firms or run by the government-owned port trusts themselves since then.
In order to migrate those operating under the 2005 tariff setting guideline, the ministry has decided to have separate rate framework for services provided by the port trusts and private firms. Whereas, the 2005 guideline—which is due for revision after a five-year run—is applicable to both port trusts and private firms running cargo terminals at these ports.
While the new rate framework for port trusts has now been issued, the new rate-setting rules for existing private cargo handlers are yet to be worked out.
Last week, the government’s chief legal advisor, the attorney general, cleared the ministry’s plan to move the existing private cargo handlers operating under the 2005 rate regime to the 2013 rate structure.
“The purpose is to ensure that all cargo handling services are brought under a common platform," the ministry spokesman said.
Kamarajar Port Ltd, the entity that runs the port at Ennore in Tamil Nadu, is outside the scope of the tariff regulator because it is run as a company.
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