Home >Politics >Policy >India’s first private container terminal set to change course

Bengaluru: The Union government-owned Jawaharlal Nehru Port Trust (JNPT) is weighing a plan to shift the terminal run by Dubai’s DP World Ltd since 1997 to a revenue-share model from a royalty format as a sharply rising royalty and stagnant rates hurt the viability of the project.

The Nhava Sheva International Container Terminal Pvt. Ltd (NSICT) is the first private container terminal at a Union government-owned port after India opened the sector to private funds in 1997.

NSICT is also one of the three container terminals operating at JNPT, which is India’s busiest container gateway loading more than half of the container cargo shipped through its ports.

“To ensure optimum utilization of resources, we are proposing to shift the project to a revenue sharing model," JNPT told the Comptroller and Auditor General (CAG) in a report submitted by the government auditor to Parliament on 18 December.

The proposal of JNPT to migrate NSICT to a revenue-sharing model after 18 years of operation due to the high royalty rate per twenty-foot equivalent unit (TEU) highlights the design deficiencies, the CAG wrote in the report. A TEU is the standard size of a container.

The earliest container terminal privatization contracts followed the royalty model. The terminal operator had to pay a royalty specified in the contract on each container handled at the terminal to the government-owned port.

Since then, the Union government-owned ports are following 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.

DP World was hit by the peculiar nature of the contract—royalty rates that were low in the first 10 years of operations and rising substantially over the balance period with no concomitant increase in rates.

DP World has been consistently handling more than 1 million TEUs a year since 2002-2003 from a terminal that is designed to load only 600,000 TEUs a year. And, from 2011-2012, the facility is contractually mandated to handle a minimum guaranteed volumes of only 600,000 TEUs.

But NSICT handled 1.4 million TEUs in 2011-12, 1.04 million TEUs in 2012-13, 969,458 TEUs in 2013-14 and 1.16 million TEUs in 2014-15.

According to the terms of the NSICT contract, the royalty was set at 47 per TEU (which translated into a revenue share of 1.57%) in the first year of operation from an amount of 3,000 per TEU levied from customers.

The royalty has progressively increased to 2,670 per TEU (translating into a revenue share of 79.92%) in 2014-15 as against a rate of 3,341 per TEU. Over the next couple of years, the royalty it is contractually mandated to pay JNPT will be more than what it is allowed to charge customers.

The proposed royalty for the 30th year (last year) of operation in 2027 is 5,610 per TEU.

NSICT, according to the shipping ministry, had not reported operating losses in any of the years. “Also due to various global/economic reasons, the container handling charges did not grow on expected lines," the ministry told CAG.

Between 2005 and 2006, the Tariff Authority for Major Ports (TAMP), the rate regulator for the ports owned by the Union government, cut rates at NSICT cumulatively by 25%. In March 2012, TAMP notified a rate cut of 27.85% at NSICT when the firm asked for a 30% raise.

NSICT, though, did not implement the rate cut of 2012 by securing stay order from the Mumbai high court. The case is yet to be decided.

“The project thus became progressively less remunerative to the operator and threatened the viability of the project. JNPT erred in structuring the project by including a royalty model that was incompatible with the tariff," the CAG wrote in the report.

Port industry executives say shifting NSICT to a revenue-share model will require the terminal to be put to re-bid to discover the price afresh.

“Because it would be impractical and unsustainable for the terminal operator to adopt the figurative translation of current royalty to revenue share for the purpose of the shift," said a port industry executive, who didn’t want to be named.

The royalty of 2,670 per TEU that NSICT is paying JNPT will be equivalent to 79.92% of the revenue per TEU of 3,341 per TEU. Sharing such high percentage of revenue will make the project unviable. Cargo contracts at Union government ports developed through the public-private-partnership is currently attracting a revenue share price bid in the range of 30-35%.

“It has to go for a re-bid because other options such as adopting the revenue share of the last awarded container terminal project through a tender at JNPT will not work out because these are two completely different projects with different scope and specifications," the executive mentioned earlier said.

DP World could not be reached immediately for a comment.

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