Mumbai: The Union government may set up a dedicated company by pooling the future income of the 12 ports it directly owns, which will then borrow 1 trillion abroad at interest rates as low 3%.

The money will help the shipping ministry, which floated the proposal, help finance port and maritime-related infrastructure projects. Only the 12 Union government owned ports—so-called major ports—will be considered under the plan.

Under the proposal, the company set up specifically for this purpose—a special purpose vehicle or SPV—will leverage the pooled income of the dollar receivables of the 12 ports to borrow from overseas insurance and pension funds which seek good returns for their capital.

The SPV will not need to hedge against exchange rate volatility, Union transport and shipping minister Nitin Gadkari said.

“Hedging cost makes dollar loans unattractive, but since income of the ports is in dollars, there would be no need of hedging and this will be help us raise around 1 lakh crore worth of loans in dollars for the development of new ports and port-related infrastructure in the country at just 3% rate of interest," Gadkari said on Friday.

Normally, firms borrowing abroad for cheaper funds must spend extra to hedge against exchange-rate volatility, since their loans are in dollars but incomes are in rupees. To be sure, the final call on the proposal will be taken by the finance ministry, which is discussing the matter with the shipping ministry. “We will soon form an SPV in which income of all government-run ports will be pooled in and this income is around $1.5-2 billion," Gadkari said.

There are 12 major ports directly owned by the Union government—six each on the west and the east coasts. Additionally, India has about 200 minor ports along its 7,000km-plus coastline. About 95% by volume and 70% by value of the country’s international trade goes through these ports. India’s latest foreign trade policy for 2015-20 has set a goods and services export target of $900 billion, almost double the $465.9 billion achieved during 2013-14. Greater overseas trade means greater revenues for India’s ports.

In January, Gadkari had said his ministry was in talks with the finance ministry for providing dollar loans to shipping firms to ease their borrowing costs. Gadkari, at an event in Mumbai, had hinted that he will facilitate shipping companies to raise dollar loans as they earn in dollars.

“The idea is to avail of cheaper loans to fund port and port-related projects. If a port is going to tap the loan market in India, it will end up securing funds attracting interest anywhere between 11% to 13%. But if there is a common pool with dollar receivables, they can fetch loans at cheaper terms," said a person close to the development. Various foreign funds, including pension and insurance funds, are keen to take part in India’s infrastructure development, he said. “It is a win-win situation for Indian ports and international funds," he said.

“The proposed idea of pooling dollar incomes of major ports is a kind of financial engineering. It can work in India. But it depends on the structure of SPV," said a former banker, who did not want to be named.

“This is perhaps an alternate way for the ministry of shipping to raise debt for the sector, as the proposed corporatisation of ports may be facing some hurdles," said Sameer Bhatia, president, Crisil Risk and Infrastructure Solutions Ltd. “Ports would be in a better position to raise funds if they were allowed to function under corporate structure. The idea of the government to pool dollar incomes of the major ports to raise debt is a different route to avail cheaper sources of finance to fund infrastructure projects," Bhatia said. He added, however, that a credible legal vehicle and a robust mechanism would need to be structured for the pooling.

On 9 March, minister of state for shipping Pon Radhakrishnan told the Lok Sabha that the handling capacity of major ports in the nation is sufficient to match trade demands. “The capacity of all major ports as on 31 March 2014 was 800.52 million metric tonnes (mmt) against cargo traffic of 555.54 mmt handled in 2013-14. Thus, the capacity utilization is around 70% and as per internationally accepted norms the gap between the traffic and the capacity is usually around 30%," the minister had said.

The person close to the development cited earlier said the government has taken measures to enhance capacity at major ports and a number of these projects are under implementation.

The government-owned Kolkata Port Trust along with the West Bengal government is setting up a new port at Sagar Island in South 24 Parganas district through a joint venture between the two, at an estimated cost of 11,900 crore. This will be the first port to be built by the Union government in 14 years. The last major port to be constructed was the Kamarajar port at Ennore in Tamil Nadu in 2001.

Major ports are also taking up several projects including construction of terminals, dredging of shipping channels and additional berths.