Private operator seeks to rework contract for Tuticorin terminal

Private operator seeks to rework contract for Tuticorin terminal

Mumbai: PSA-SICAL Terminals Ltd, the entity that operates India’s fourth largest container terminal, at the Union government-owned Tuticorin port, will seek government approval to shift from a royalty format to a revenue-sharing arrangement for the remaining 22 years of its 30-year contract that started in 1999.

This is the first instance of a private container terminal operator seeking to re-negotiate a key term after it was awarded on a pre-agreed method. Such a shift will shield the world’s second biggest container port operator from volatilities in cargo volumes and non-revision of tariffs by the Tariff Authority for Major Ports (TAMP), the tariff regulator that sets prices for cargo handling services at the 12 Central government-owned ports including Tuticorin.

PSA-SICAL operates a 4.5 lakh 20-foot equivalent unit (teu) capacity container terminal at Tuticorin. A teu is the standard size of a container and is a measure of capacity in the container business.

Under the royalty format, the operator has to pay a certain amount as royalty on each teu handled at the terminal to the government-owned landlord port. In revenue share, the operator has to pay a percentage of his annual operating gross revenues to the port.

The bidder quoting the highest royalty or revenue share as the case may be in a competitive bidding process, wins the deal. The revenue share percentage secured through a bidding process will remain constant throughout the tenure of the contract. But, the royalty per teu could increase every year by a certain percentage.

PSA International Pte Ltd, wholly-owned by the Singapore government’s investment arm Temasek Holdings (Pvt.) Ltd, has a 57.5% stake in PSA-SICAL. Local firm SICAL Logistics Ltd holds 37.5% stake in the company.

As per the policy prevailing at the time, the government had awarded the contract in 1998 to a consortium-led by PSA for operating a container terminal at Tuticorin port for a 30-year period on a royalty per teu format. As per the terms of the contract, the royalty per teu rises by about 30% every July, this year it has jumped to Rs1,010 per teu from Rs780 per teu. In the 30th and final year of its operations in 2029, PSA-SICAL will have to pay, at this rate, a royalty of Rs5,200 per teu to the government.

“To pay this level of royalty and to recover our operational expenses and make a profit, we will have to charge our customers (mainly shipping lines) about Rs10,000 per teu. But, if we charge such high tariffs from our customers, nobody will come to India. They will go to some other port," said a senior official at PSA-SICAL who did not want to be named ahead of a crucial meeting with the shipping ministry and the Tuticorin port trust to discuss the issue.

In 2001, the government decided to changfe the bidding criteria by awarding contracts on the revenue share format. Earlier, the royalty/revenue share paid by the private terminal operators to the landlord port was treated as an item of expenditure and recovered from the terminal users or customers as part of tariff. But, the shipping ministry scrapped this practice through a policy circular issued on 29 July 2003. This was done to prevent operators from quoting a very high revenue share percentage to win the contract and then passing that on to users.

The policy of not allowing royalty/revenue share to be passed on to customers now forms part of the guidelines for fixing tariffs. It is also clearly indicated in the tender documents for developing projects after July 2003.

The government, however, gave relief to those projects that started operations prior to July 2003 who were adversely impacted by this sudden policy change. It said that if an operator incurs a loss because of royalty/revenue share not being allowed as a cost, it will be included as a part of tariff subject to the maximum royalty or revenue share quoted by the second highest bidder in the tendering process. But, this arrangement will cease when the operator starts making profit.

“Royalty paid to the government port is an expenditure and we cannot ignore this element while fixing tariffs," the PSA-SICAL official said. In effect, it is operating with the tariffs approved in 1999 when it started operating the terminal. But, all these years, the royalty has been increasing. PSA-SICAL has argued that if the tariff is lowered by 50% as per the TAMP order of September 2006, the terminal will become commercially unviable.

“We will make a proposal to shift from royalty to a revenue share format during the meeting with the shipping ministry. That is one of the options. The other is to allow us to recover the royalty paid in full as tariff," the official said.