In the past, traffic at ports grew at 8 per cent per annum. To ensure servicing of this increasing traffic, there was an insistence that concessions be given at major ports that achieved minimum guaranteed traffic (MGT) every year, with termination in case of persistent default.
However, in recent years, traffic growth has been anaemic with no respite for MGT due to rigid concessions. The Kelkar Committee, which looked into reviving stalled infrastructure projects, has rightly recommended that mechanisms be put in place to renegotiate concessions. One of the options that emerged is to make the concession period variable, ending with the realisation of predetermined/pre-bid revenue in net present value terms.
Another issue at major port terminals is that of the ceiling tariff set by the tariff regulator. Ceiling tariff is the highest tariff among competing terminals at a port. While this has addressed the risk of sudden tariff revisions by the regulator, the question which arises is the relevance of regulating tariff in a competitive port industry. Also, the ceiling tariff goes up each year, as it is inflation indexed. The revenue share payable by the investor to the port trust also goes up as the royalty is based on the indexed tariff. But the actual tariff levied declines with competition and this increases the effective royalty percentage.
The investor also resorts to tariff discounts to meet the MGT. But such discounts impair the ability to service debt and increase financial risk. In non-major ports, royalty payable to the government is often a certain sum payable per tonne of cargo and the investor is entitled to the whole benefit from increases in traffic. But in major ports, as royalty is a percentage of gross revenue, the investor is obliged to share the equity increase arising from growing traffic at the port trust. However, the port trust does not share the downside risks as royalty is assured based on the MGT. Overall, insisting on a minimum guaranteed volume of cargo and royalty based on total revenue is a zero-sum game aimed at maximising the treasury of the major port trusts rather than the trade. After all, investors can be rationally expected to maximise traffic given the risk of investment.
In case of termination of concessions due to political events, compensation is based on a certain return to equity capital and it ignores the loss of potential profits that were likely to be made by the investor had the concession been allowed to run its full course. A change in this provision to account for such opportunity losses would be critical to attract international investors.
Among the other issues that need to be revisited are mechanisms to check the possible dominance of the terminal investor by the port trust. The port trust is responsible for providing common maritime infrastructure to the investor. But interestingly, the port trust competes with the terminal investor as the former operates other terminals at the port. The Competition Commission of India and the sector regulator too have a role to play. In the case of projects supported with viability gap funding by the government, the concession needs to provide for mechanisms to address issues arising in case the underlying commercial and other assumptions are not realised.
Given traffic risks, investors prefer captive ore and coal berths. These projects face risks like the cancellation of mining licences by courts. Hopefully, in the future, the concession design will allow for greater flexibility. While captive berths would mitigate traffic risks, their success hinges on the fortunes of the associated industry and the risks of the company using it. Also, the original concession needs to be examined if captive use is permitted. The financial projections in the original bid submissions no longer remain relevant later and this creates issues in determining compensation. Investors sometimes take sub-concessions. The risk here is whether the terms of the original concession, like residual concession life and the basis of land allotment and facilities, are appropriate. There is also the risk of termination of the original concession ahead of the sub-concession.
To conclude, as investors realign their investment priorities with changing economic realities, they also need to undertake legal due diligence to ensure that the new contractual arrangements are legally tenable besides being commercially viable.
(The author is Balasubramanian, a lawyer with J. Sagar Associates, and the views are personal.)
