Bangalore: Two of India’s earliest private container terminal projects at Jawaharlal Nehru port near Mumbai and Tuticorin port in Tamil Nadu, both owned by the Union government, have started making losses on the back of tariff cuts.

On 1 March, the Tariff Authority for Major Ports (TAMP) asked Nhava Sheva International Container Terminal Pvt. Ltd (NSICT) to pare rates by 27.85% when the firm asked for a 30% raise.

NSICT is owned by Dubai-based global port operator DP World Pvt. Ltd.

Royalty burden: A file photo of JN port near Mumbai. The royalty that the two firms pay the ports on each container handled has exceeded the revenue they earn per container. Photo by Mint.

PSA-Sical Terminals Ltd, a firm running a container terminal at V.O. Chidambaranar at Tuticorin, is 62.5% owned by PSA International Pte Ltd, the world’s second biggest container port operator.

It has also been hit by rate cuts.

The two terminal operators say the tariff cuts would reduce their revenue earning capability and position them as loss-making units.

The royalties these firms are contractually-mandated to pay the government-owned ports on each container handled at their respective terminals have exceeded the revenue they earn from each container.

Both these contracts followed the royalty model that was in vogue when the government flagged off a port privatization programme in 1997. The terminal operator had to pay a certain royalty, specified in the contract on each container handled at the terminal, to the government-owned port.

Both PSA and DP World were done in by the peculiar nature of the contract-royalty rates, which were low in the first 10 years of the contract and then rose rapidly over the remaining period of 20 years, making it difficult to run the terminals profitably in the face of rate cuts.

The union government-owned ports now follow a revenue-sharing model for port privatization contracts.

The bidder willing to share the most from its annual revenue with the port wins the contract.

According to the terms of PSA’s contract at Tuticorin port, the royalty per loaded standard container was 102 in the first year of operations. In the 30th year of operations, in 2028, it would reach 5,178 for a loaded standard container. PSA-Sical currently charges its customers around 2,100 for handling a loaded container.

PSA pays 2,264 as royalty to Tuticorin port on each loaded container handled at the terminal. This will rise to 2,490 from 15 July this year.

In the 14 years since starting operations, PSA made three attempts to raise rates for the services provided at the terminal; but, each time, the tariff regulator slashed rates—by 15% in 2002, 54% in 2006 and 34% in 2008—which PSA did not implement by securing stay orders from the Chennai high court.

It is operating the 450,000 standard container capacity-a-year terminal at rates approved in 1999, when it started out on a 30-year contract.

NSICT has been a little luckier. It managed to win some tariff increases from TAMP in the first 15 years of operations.

DP World handles some 1.4 million containers at NSICT every year, more than double the original designed capacity of 6,00,000 containers.

Its royalty increases progressively from 47 for one loaded standard container in the first year of operations in 1998 to 5,610 per container by the 30th year, in 2027, according to contract terms.

NSICT was earning 2,505 on each container handled at the terminal.

But, after the 1 March rate cut, it can charge customers only 1,807 per container.

It pays a royalty of 2,218 per container to JN port. This will rise to 2,361 per container from 3 July this year.

Between 2005 and 2006, TAMP cut rates at NSICT cumulatively by 25%. The latest blow came on 1 March.

Besides, the port policy that prevailed in 1998 allowed the royalty fully paid by the firms to the port as an item of cost while setting rates.

But, in July 2003, the shipping ministry altered this policy and allowed only a partial pass-through of royalty into tariffs, limiting the extent of pass-through of royalty to the maximum quoted by the second highest bidder in the auction.

Both DP World and PSA declined to comment.

“Global firms are keen to participate in India’s port projects by bringing new generation technology and much wanted capital," said Samir Kanabar, partner, tax and regulatory services at Ernst and Young Pvt. Ltd. “So it’s important to have a consistent and sustainable policy framework that scales up to international standards."