Mumbai: Companies setting up new cargo handling facilities at India’s 12 main ports will be able to increase their charges by 3% every year to account for rising costs. However, those companies that currently offer such services at these ports will not be able to increase ther rates because this will require their agreements with the government to be amended.

Higher rates:In this file picture, a trailer carries a container at the Jawaharlal Nehru Port in Navi Mumbai.

The rates that can be charged by cargo handlers will now be fixed even before bids are invited from companies to build and operate terminals. This rate will now be linked to the Wholesale Price Index, a measure of inflation, to the extent of 60%, according to new government guidelines.

The 12 Union government-owned ports handled 464 million tonnes (mt) of cargo in the year through March, accounting for 70% of the 649mt of cargo handled by all Indian ports. Taking into account India’s average inflation rate of 5%, the prices charged by new private terminal operators at these ports will rise by 3% each year (ie; 60% of 5%).

The government plans to modernize and upgrade cargo handling terminals at the 12 major ports with an investment of Rs50,000 crore through private investments over the next five years.

“The indexation to Wholesale Price Index will mean that there will be no periodic intervention by the tariff regulator for major ports to revise tariffs. The tariffs fixed upfront before inviting bids for individual projects, will remain valid for the entire contract period (typically stretching into 30 years), except for the automatic revision on 1 January each year because of the indexation to WPI," said a Union shipping ministry official, who did not want to be identified.

Under the new plan, tariffs will be fixed initially by the Tariff Authority for Major Ports, or TAMP, on the basis of an estimate of capital and operating costs of building and operating a cargo handling terminal of a particular capacity, rather than fixing them on a cost-plus model, after winning bids are chosen.

The upfront tariff thus fixed will be included in the bid documents.

Winning bids, under the new plan, will be selected according to those willing to share the highest percentage of annual gross revenues with the port where the cargo terminal is being set up.

Current tariffs are fixed by adding 16% to the actual costs for a three-year period. “Determinig tariff on cost-plus basis did not provide the requisite incentives for improving efficiencies and reducing costs. Cost-plus tariffs are also known to promote padding of costs," said the ministry official.

Companies that offer cargo handling services under existing agreements say they would also like a similar arrangement to increase their rates. “Any improvement in the system should flow to all terminals—existing as well as new," Ganesh Raj, senior vice-president and managing director, (Indian) subcontinent at the Dubai-government owned port operator DP World, had said earlier. DP World runs terminals at JN Port, Mumbai, apart from Kochi, Chennai, Vizag, and Mundra.

For the purpose of fixing tariff upfront under the new method, TAMP will follow a cost-based approach that recognizes capital and operating costs estimated on certain norms. It will also include a 16% return on capital employed.

Accordingly, an estimate of the capital cost of building a new terminal for a particular commodity or class of commodities of a certain capacity will comprise civil construction cost including dredging and reclamation, equipment and plant and machinery, IT systems, and cost of financing, including interest paid during construction.

The annual operating cost of the terminal will comprise power and fuel, repairs and maintenance, insurance, depreciation and lease rentals.

The new guidelines also provide for “reviewing the tariff fixed upfront once in five years to adjust for any extraordinary events that could not have been forseen by a prudent person".

The ministry official said that the new policy aims to create adequate port capacity and promote competition so that efficient and reliable services are provided at competitive rates. “The objective should be to keep tariffs at economic levels with a view to making India globally competitive," he said. Almost 95% of India’s trade by volume and 70% by value is shipped by the sea route.

Currently, tariffs vary from port to port and between different terminals of the same port. Tariffs for handling containers at ports range between Rs971 and Rs3,540 per container. At different terminals at the JN Port, the tariffs range between Rs2,550 and Rs3,540 per container.