The earliest container terminal privatization contracts such as the one at Chidambaranar port followed the royalty model. 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. Photo: Bloomberg
The earliest container terminal privatization contracts such as the one at Chidambaranar port followed the royalty model. 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. Photo: Bloomberg

Chidambaranar port: Arbitration panel for revenue share format

Arbitration panel backs PSA International plea to shift to revenue share format at the VO Chidambaranar port in Tamil Nadu

Bangalore: An arbitration panel that heard the vexed rate issue at a container terminal run by PSA International Pte. Ltd at Union government-owned VO Chidambaranar port in Tamil Nadu has supported the Singapore firm’s plea to move to a revenue share format for the residual contract period that ends in 2028, two people familiar with the details of the arbitration award said.

PSA-Sical Terminals Ltd, the entity that runs the container terminal at Chidambaranar port (formerly known as Tuticorin port), is 62.5% owned by PSA International, a unit of Temasek Holdings Pte Ltd, the sovereign wealth fund of Singapore.

The arbitration award, given last week, says that PSA-Sical Terminals should be allowed to move to a revenue share format from a royalty model by adopting the revenue share percentage of 55.19% quoted by ABG Container Handling Pvt Ltd in September 2012 for a new container terminal, the second at Chidambaranar port, a spokesman for Chidambaranar port, one of the two people mentioned above, said.

The earliest container terminal privatization contracts such as the one at Chidambaranar port followed the royalty model. 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.

Since then, Indian government-owned ports have switched to the revenue share model for port privatization contracts. The bidder willing to share the most from its annual revenue with the government-owned port wins the contract.

PSA had earlier lobbied the government to migrate from a royalty format to a revenue share model for its Tuticorin facility, which was not acceptable to the shipping ministry.

Confirming the arbitration award, a spokesman for Chidambaranar port, said: “A decision on accepting or rejecting the arbitration award will have to be taken by the board of trustees of the port."

“It’s a major decision; even if the board of trustees accepts the award, it will have to be ratified by the shipping ministry", the spokesman said.

PSA declined to comment.

In October 2011, PSA secured a stay from the district court in Tuticorin where it has run the terminal since 1999 to freeze the annual royalty it is contractually mandated to pay Chidambaranar port at the level set for 2011 as part of the 30-year contract. This was the first instance of a court-backed freeze on revision in royalty for a port contract after the ports sector was opened to private funds in 1997.

According to the terms of the PSA contract, the royalty per container was 102 in the first year of operations. In the 30th year of operations in 2028, it would reach 5,178 for a container. The royalty rises by about 20% every year in July till the end of the contract.

PSA-Sical currently charges its customers some 2,100 for handling a standard container.

As a result of the Tuticorin district court order, PSA continue to pay a royalty of 1,969 per container (the level set for 2011 in the contract) to Chidambaranar port. If the stay had not been granted, PSA is contractually mandated to pay 2,264 per container as royalty to Chidambaranar port from 15 July 2012. This will rise to 2,490 a container from 15 July 2013 and further to 2,615 from 15 July 2014 and so on. Chidambaranar port had filed an appeal in the Madurai bench of the Madras high court to vacate the stay granted by the district court. PSA opted for arbitration while the Madurai bench of the Madras high court was hearing the case.

If the arbitration award is acceptable to both the parties, the court case would be closed. Otherwise, the litigation will continue. Chidambaranar port also has the option of filing an appeal in the Madras high court against the arbitration award, a Mumbai-based port consultant, who has studied the case, said on condition of anonymity.

In 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 for the Indian government-controlled ports slashed rates by 15% in 2002, 54% in 2006 and 34%in 2008, which PSA did not implement by securing stay orders from the Madras high court.

In effect, PSA is operating the facility with a capacity to handle 450,000 standard containers a year at rates approved in 1999, when it started out on the 30-year contract.

PSA has defended its move to freeze the royalty pay-out with the backing of the court, arguing the tariff cuts would reduce the revenue earning capability of the terminal and position it to be a loss-making unit.

This is because the revenue earned will not be sufficient to cover the cost of operating the terminal, leave alone make profits after sharing a portion with the government port every year.

PSA has argued in court that it cannot give more royalty to Chidambaranar port till it is allowed to increase the rates.

A shift to a revenue share model will help PSA earn profit from the terminal; otherwise, it will have to pay money from its own pocket to fund the royalty payout to the government-owned port, the Mumbai-based port consultant mentioned earlier said.

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