The shipping ministry now plans to adopt this model while allotting land and waterfront through auction to port-based industries to set up berths, oil jetties, trans-shipment jetties, offshore anchorages, single-point moorings for discharging imported crude oil and so on for their own captive use of importing raw materials and exporting finished products. Photo: Bloomberg
The shipping ministry now plans to adopt this model while allotting land and waterfront through auction to port-based industries to set up berths, oil jetties, trans-shipment jetties, offshore anchorages, single-point moorings for discharging imported crude oil and so on for their own captive use of importing raw materials and exporting finished products. Photo: Bloomberg

Revenue share to play a bigger role in deciding contracts at state-owned ports

Under this model, the bidding group willing to share the most from its annual revenue with the government-owned port wins the deal, typically stretching to 30 years

India’s shipping ministry is widening the ambit of the revenue share model, which until now has been used only for building multi-user cargo loading facilities with private funds through the public-private-partnership (PPP) route.

Under this model, the bidding group willing to share the most from its annual revenue with the government-owned port wins the deal, typically stretching to 30 years.

The ministry now plans to adopt this model while allotting land and waterfront through auction to port-based industries to set up berths, oil jetties, trans-shipment jetties, offshore anchorages, single-point moorings for discharging imported crude oil and so on for their own captive use of importing raw materials and exporting finished products.

A port-based industry is an entity dependent on a state-owned port for import and/or export of at least 70% of the designed capacity of the proposed facility for captive (own) cargo.

Such entity includes a special economic zone (SEZ) and free trade warehousing zone (FTWZ).

Such captive use facilities have so far been allowed to be developed by industries without going through tenders and had no element of revenue sharing.

The ministry reckons that the potential for development of such facilities has not yet been fully realized.

This is attributable mainly to the absence of clearly defined benchmarks for price discovery for the allotment of land and waterfront and lack of clarity in the guidelines about the processes to be followed.

The demand for such facilities is expected to grow after the ministry flagged off an ambitious maritime project named Sagarmala, with its focus on port-led development.

The highest revenue share offered will be the sole criteria for the award of contracts to port-dependent industries for developing captive use facilities.

But, unlike multi-user terminals set up with private funds on a PPP basis, the port authority concerned will set a floor level revenue share for the auction for captive facilities.

Price quotations that are below the floor level revenue share will be rejected and the entity willing to share the highest portion of revenue above the floor level will win the deal.

A similar strategy was followed by the ministry last month when it approved a policy for selling permits to stevedores and shore-handling agents who load and unload cargo from the non-PPP berths of state-owned ports.

Here also, a floor-level revenue share will be fixed by the port authority and the highest revenue share determined through tender will have to be matched by all the eligible stevedores and shore handling agents to be allowed to hold permits for work.

In the scam-ridden backdrop leading to the victory of the Bharatiya Janata Party-led National Democratic Alliance (NDA) government in the May 2014 polls, the shipping ministry’s resolve to adopt a revenue share model for more deals is understandable; it would potentially forestall charges of corruption and favouritism in auctioning port assets to private firms.

It is this objective that has led the ministry to tell some PPP operators seeking improvements to their existing contracts to opt for a fresh auction to discover price afresh when terms are to be changed mid-way through the contract period.

The increased emphasis on a revenue share model also comes at a time when some experts have suggested that India’s state-owned ports should consider new models for auctioning port assets based on the practices prevailing globally.

These suggestions include awarding concessions on the basis of funds invested, the employment generation potential of the facility being created to selecting the bidder that charges the least from customers for the services and sharing of profits and not revenue.

The suggestions for looking up a new model cropped up after some PPP project that were awarded on the revenue share model failed to materialize because the high share quoted by the winning entity reduced the bankability of the projects and failed to attract funds.

The delay in implementation, apart from the financial loss, sets off the capacity expansion plan by a few years, hurting India’s external trade.

This is not to suggest that the revenue share model is flawed. The high revenue share quotation placed by private firms is not the fault of the government. When pubic port assets are auctioned, naturally they will fetch high revenue share price bids.

But what the government can and should do is to black-list companies putting in wild revenue share price bids and then walking out without implementing the projects by forfeiting just a small amount given to the government as a bank guarantee. That would act as a deterrent against such motivated plans.

P. Manoj looks at trends in the shipping industry.

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