Proposed market-driven pricing at India’s major ports is a chimera

If you thought that a new law planned to govern 11 of the 12 ports owned by the Indian government would solve the complex rate-setting problems at these ports, think again. It is nothing but old wine in a new bottle.

It is widely acknowledged that rate regulation has stifled the growth of the 11 ports and led to a diversion of cargo to private ports that are outside the control of the Indian government and where rates are decided by market forces.

India’s shipping ministry has been looking at ways to create a level-playing field between the major ports (Union government-owned) and private ports either by winding down the Tariff Authority for Major Ports (TAMP) or by enacting a new law to govern the 11 ports which would render the rate regulator redundant.

And, this is one issue where even the stubborn workers unions are on the side of the government.

While a new law to govern the 11 ports (the 12th, Kamarajar port near Chennai is run as a company) from the current trustee set-up is long over-due, given the changes that have taken place in Indian ports over the last decade, the government, it appears, is clueless on the path forward on rate setting.

A close scrutiny of the draft of the Central Port Authorities Act 2016 clearly indicates this lack of clarity on the issue.

The board of a port authority will be delegated power to fix rates for services and assets. A rate regulator does not figure in the proposed new law.

So, what or where is the difference?

None.

Currently, rates for services rendered by the 11 port trusts are set by TAMP based on a tariff policy issued by the shipping ministry in January 2015. Rates for cargo terminals to be developed by private firms are set by the regulator based on the guidelines issued in 2013.

The rates for privately-run cargo terminals that were awarded between 2008 and 2013 are fixed on the basis of guidelines issued in 2008.

The rate guidelines of 2008 and 2013 follow an upfront model where the rates are fixed at the beginning of the contract for the entire 30-year period. The rates, though, will rise every year because they are indexed to the Wholesale Price Index (WPI) to the extent of 60%.

The 2013 tariff-setting norms also allow a private cargo-handler operating at any of the 11 ports to seek an additional performance–linked rate hike of as much as 15% every year if it fulfils certain performance standards.

The rates for private cargo terminals operating prior to 2008 follow the rate-setting guidelines issued in 2005. The validity of these guidelines ended in 2010 after a five-year run, but has been continuously extended by the government and is in vogue even today.

In all these cases, TAMP set rates based on the guidelines framed by the ministry. The villain, according to cargo-handlers, is the ministry guidelines and not TAMP, which acts as a mere rubber stamp.

TAMP is also a toothless regulator in the sense that it has no powers to enforce its decisions. Cargo terminals affected by the regulator’s orders often had to take legal recourse to get the rate cuts stayed. There are plenty of such cases that are yet to be decided by the courts even after many years.

In the proposed new law, rates at each of these ports will be decided by the board of the respective port authorities or a committee formed by the board based on some tariff policy/guidelines. The question is who will frame these guidelines? Is it the government or is it the respective port authority? Will the new norms follow the current one that is considered flawed?

The rates set by a board-appointed panel will have to be ratified by the board prior to implementation.

Also, this perceived pricing freedom would have been fine if it was given separately to port authorities and private operators for services rendered by them. But, in the absence of any specific mention to the contrary in the draft law, it is understood that the port authorities will also be tasked with setting rates for private facilities.

This will lead to unfair competition and a lack of a level-playing field because these ports also run cargo terminals that compete with private facilities therein. This was precisely the scenario that led the government to create an independent regulator to set rates for port trusts and the private facilities operating at these ports when the port sector was opened to private funds in 1997.

The proposed mechanism to set rates can in no way be called market-driven pricing. The port authorities will never give a free hand to private cargo terminals to set their rates based on market forces for obvious reasons though they may have the flexibility to play around with the rates within a ceiling. In such a situation, private cargo-handlers would be better off dealing with an independent rate regulator rather than with the port authorities.

The central government, according to the final draft of the Central Port Authorities Act, will have the right to frame rules for, or to issue directions to, every port authority either individually or collectively in matters related to (among others) fixation and implementation of rates. This practice exists even today.

The devil will be in these rules that the government says it has the right to frame to fix rates.

The fact that the government has decided to set up an independent review board for, among others, hearing disputes between port authorities and private cargo-handlers is in itself an admission that it does not believe that the new mechanism would function smoothly, free from litigations.

In short, in the proposed new regime, the board of a port authority or one of its committees will set the rates that are currently set by TAMP. This is the only difference; everything else will remain the same.

P. Manoj looks at trends in the shipping industry.