The Indian port sector has experienced increasing private participation over the years. The private sector has contributed to the development of infrastructure and mechanisation of facilities through large-scale investments, as well as brought in improvements in operational efficiency. At major ports, 45 projects worth Rs 185 billion have been completed through public-private partnerships (PPPs), adding a capacity of 285 million tonnes (mt). However, the slow pace of project execution and implementation does dampen the prospects of private participation in the sector. The lingering issues include delays in obtaining necessary approvals, land acquisition problems, lack of clarity in the policy and regulatory framework, among others.
Experience so far
With 100 per cent foreign direct investment (FDI) being permitted as well as other favourable policy initiatives, the sector has attracted several foreign players, primarily in the container terminal segment. PSA International (Singapore), Dubai Ports World (Dubai), APM Terminals (The Netherlands) and OJSC (Russia) all have a strong presence in the sector. These international players have entered the sector either on their own or by forming consortiums with domestic players.
Over the years, different forms of private participation have been employed in the port sector. For the construction of terminals and berths, build-operate-transfer (BOT) is the most popular format. Under this mode, projects have been executed primarily through the setting up of special purpose vehicles (SPVs) that finance, build, operate and maintain the project for a given period of time, after which the project is handed over to the port trust. Generally, the concession period for the development and operation of such projects is 30 years. Financial partnerships under such SPVs are through equity participation of both public and private entities. More recently, a variant of the BOT format, design-build-finance-operate-transfer (DBFOT), is also being used for undertaking capacity augmentation projects at major ports.
The revenue share of private players, which was in the range of 20-40 per cent in the initial years of inviting private participation, increased to more than 50 per cent in 2010 and 2011. This trend of aggressive bidding started around early 2008, when the objective of many investors was to just win bids, which would help them sell their firms at a high valuation. This was due to the fact that a larger number of bids won would translate into a higher discounted cash flow for future projects. However, this aggressive bidding led to the cancellation of contracts at a later stage at the Jawaharlal Nehru Port Trust (JNPT) and Kamarajar port. Major ports now get revenue shares ranging from single digits to around 30 per cent.
At present, 37 projects through the PPP mode involving an investment of Rs 353.77 billion are under implementation or are planned at major ports. On completion, these projects will add a capacity of 337 mt. JNPT, with three projects, accounts for the highest share (35 per cent) in the total upcoming investments at major ports. Some projects entailing large investments are the development of the fourth container terminal at JNPT (Rs 79 billion), a liquefied natural gas terminal by Indian Oil Corporation at Kamarajar port (Rs 45 billion) and a floating storage and regasification unit (FSRU) at Kolkata port (Rs 35 billion).
In addition, the government plans to set up new major ports on a PPP basis at an investment of Rs 320 billion. These are Colachel, Tamil Nadu (Rs 60 billion), Dahanu, Maharashtra (Rs 90 billion), Sagar Island, West Bengal (Rs 110 billion) and Dugarajapatnam, Andhra Pradesh (Rs 60 billion).
Key issues and challenges
Obtaining clearances has been an uphill task for private players. Due to multiple approvals being required and the inordinate delays in securing them, there is typically an average lag of two years between the date of award of a project and the commencement of construction work. Delays in securing clearances have led to cancellation of projects, the selected developer backing out of the project, delays in commissioning of projects, etc. Some major port projects which have been severely affected due to delays in obtaining environmental clearances are the development of a multi-cargo berth at Paradip port, the development of North Cargo Berth (NCB) No. IV at V.O. Chidambaranar (VOC) port, the development of an oil jetty to handle liquid cargo and a ship bunkering terminal at Kandla Port, and the development of an iron ore export terminal at Mormugao port.
The formulation of a model concession agreement (MCA) for private sector projects at major ports has also not helped much. As per the MCA, ports need to hand over physical possession of the project site and backup area (the port’s assets) to the concessionaire within the time stipulated in the concession agreement. However, there have been considerable delays well beyond the stipulated time in handing over the project site/land. For instance, for Berth No. 7 at Mormugao port, the concession agreement was signed in September 2009 and the scheduled date of handover of the project site and backup area was March 21, 2010. However, the actual handover date was January 16, 2014.
Further, port contracts lack clearly defined risks and responsibilities for the parties involved in the process, leading to scope for ambiguity and dispute. In a few instances, non-fulfilment of conditions precedent by the concessioning authority has been one of the major reasons for delays in commissioning port projects. Even if the project is ready for commercial operations, the lack of adequate connectivity or draught can render operations unviable for the concessionaire.
As per the concession agreement for multi-cargo Berth Nos. 13 and 15, the Kandla Port Trust (KPT) was liable to provide the common road and rail facility outside the licensed premises of two berths. Commercial operation of the berths started from February 2013 and November 2013 respectively. However, according to reports, KPT could not provide rail connectivity between the hinterland and the port, which impeded the speedy evacuation of cargo from these berths. Concessionaires for the project, RAS Infraport Private Limited and JRE Infraport Private Limited, raised the issue of non-provision of rail connectivity as well as other issues and did not remit the licence fee, revenue share, etc. to the port trust.
Further, the issue of migration from a regulated set-up to a market-driven pricing regime announced in 2013 for projects bid out since then (for 16 existing port contracts [10 of which are private]), has been in a state of flux for quite some time.
The way forward
Undoubtedly, along with supplementing public investments, private participation has brought in new standards of efficiency. Going forward, there is a need to develop well-designed contracts with clearly defined risks and responsibilities for all parties involved in a project. Adherence to the time frame fixed for completion of the bidding process and a mechanism to ensure timely environmental clearances for each project well before the commencement of the tendering process will play a key role in determining the level of investor interest.
Given the long-term nature of port projects, policy initiatives that improve risk-reward structures and increase the availability of lower-cost and higher-tenor financing will be vital for meeting targets. W