Lessons from India’s port privatization

Lessons from India’s port privatization

In October, the Madras high court set aside a December 2008 order passed by the Tariff Authority for Major Ports, or TAMP, to cut rates by 34% at the container handling terminal in Tuticorin port on India’s eastern coast. TAMP sets rates for 11 of the 12 Union government-owned ports in the country.

PSA-Sical Terminals Ltd, the operator of the container terminal at Tuticorin port, is 57.5% owned by PSA International Pte Ltd, the world’s second biggest container port operator. The remaining stake is held by Sical Logistics Ltd.

In its October order, the Madras high court asked the tariff regulator to revisit the case and pass a fresh order.

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So after seven years and three attempts to raise rates for the services provided at the terminal, PSA-Sical is back to square one. In effect, 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. PSA-Sical currently charges its customers some Rs2,300 for handling a standard container.

In September 2002, TAMP reduced the then existing tariffs at the facility by 15% when the terminal operator asked for a hike. PSA-Sical challenged the order. The Chennai high court stayed the TAMP order and allowed the operator to charge rates that prevailed earlier.

In September 2006, TAMP ordered a 50% reduction in tariff over the 1999 rates when the operator sought a 30% increase. PSA-Sical filed a writ petition. In August 2007, the Madras high court quashed the TAMP order and directed that the matter be decided afresh.

Accordingly, the tariff authority passed a fresh order in December 2008 reducing rates that were approved in 1999 by 34%.

One of the main issues involved in this case is the royalty that the operator has to pay the government-owned port for handling a container. According to the terms of the contract, the royalty per container was Rs102 in the first year of operations. In the 30th year of operations in 2029, it would reach Rs5,178 for a container.

The royalty rises every year on 15 July. This year, the operator is paying a royalty of Rs1,641 per container. Next July, it rises to Rs1,969 a container. Very soon, the royalty payable to the government-owned port will exceed the rates charged from customers. With ageing of assets, the return allowed on capital in tariff setting decreases over a period of time.

Even today, the terminal is operating at a cash loss because the revenue earned per container is not sufficient to cover the royalty paid to the port and the operating expenses of the facility.

But PSA-Sical has nobody to blame except itself for this mess. Because, in its zeal to win the project, PSA-Sical quoted unrealistic and unworkable royalty that was low in the first 10 years of the contract and rapidly rising over the balance period.

There is another problem involved here. The tariff approved in 1999 included the royalty paid to the port as an item of cost.

But in July 2003, the shipping ministry issued a policy ruling that royalty or revenue share paid by private terminal operators to government-owned ports would not be allowed as a cost item while setting tariffs.

The ministry had issued this policy after it found that private firms were quoting high royalty or high share of their annual revenue with government-owned ports during auction to win port contracts and then recovered the same from the port users.

After private firms that started operations prior to July 2003 complained that the new rule made their terminals commercially unviable, the shipping ministry issued an amendment allowing the royalty/annual revenue share paid by them to government-owned port as a cost item for fixing tariffs. This, however, came with a rider. To avoid likely loss to the operator, the ministry said the extent of pass-through of royalty/revenue share into tariffs would be limited to the maximum quoted by the second highest bidder in the auction. And this arrangement will cease when the affected terminals start making profits.

PSA-Sical, however, wants full royalty paid to the port as a pass-through in tariffs.

Tariff increase is not the problem here. The root cause of the problem is the absurd royalty quoted by the operator. Having committed to pay such a royalty in the auction, PSA-Sical has no other option but to pay.

The lesson here is to quote what you can realistically pay. Also, you cannot ask customers to pay for something (royalty) that you have to pay on your own to discharge contractual obligations.

P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at allaboveboard@livemint.com