In September 2016, the Ministry of Shipping (MoS) proposed a new model concession agreement (MCA) for the port sector. This agreement aims to replace the existing MCA, which has been in place since January 2008. The revised MCA is expected to resolve some of the long-standing issues of private terminal operators at major ports. The MoS has taken into account suggestions made in various reports by the NITI Aayog (the erstwhile Planning Commission) (2010), the Indian Ports Association (2015) and the Kelkar Committee (2015) while modifying the MCA.
The revised MCA has proposed the simplification of the exit option for the concessionaire. Under the new agreement, the concessionaire will hold 51 per cent equity in the project for the first three years after commercial operation date (COD) and 26 per cent thereafter, for next three years. Thus, the private party will be free to exit the project after six years. “It enables unlocking of capital and is a welcome step, however, there should be clarity on the type of investors who would be allowed to come in (port players, infrastructure investors, financial investors) and a clear procedure (in terms of eligibility, security and other clearances) for the same should be established,” says A. Balasubramanian, a lawyer at J. Sagar Associates.
In order to facilitate the availability of low-cost long-term funds, the revised MCA has the provision for debt refinancing. Under this, the concessionaire can issue bonds on the completion of one year of operations for refinancing its debt. This is expected to improve the financial viability of projects. However, there is no clarity on the duration of bonds to be issued. The new MCA also has the provision for a mid-term review of the concession agreement. It is recommended that the agreement be assessed by a review board under applicable laws at the end of 15 years from COD to undertake mitigation measures if required. According to Balasubramanian, “A mid-term review is a programmatic response on the part of the government to take care of uncertainties which are typical in a long-term contract.”
Meanwhile, the revised MCA has proposed the start of operations at the port even before the actual COD of the project for better utilisation of port assets. However, this will be based on specific terms and conditions with respect to the level of operations and payment to the port authority. In order to improve the utilisation rate of port assets and to raise productivity, the new MCA has specified that the concessionaire is free to deploy higher capacity equipment and facilities than those specified in the scope of work. Further, the new agreement provides the concessionaire with the option to adopt revised tariff guidelines as and when these are issued by the government. The option to adopt the new guidelines will need to be availed of within 90 days of publication in an official gazette.
The revised MCA, if implemented, will have a provision for the replacement of the approved project cost with the actual project cost with prescribed procedures for this change. At present, if the actual project cost, is higher than the estimates, the concessioning authority may increase the project cost. However, the procedure for this is not specified. Under the new agreement, the concessionaire will submit the statement of actual capital costs incurred on the project within a period of 90 days of the issue of the completion certificate. If the actual cost is more than the estimated project cost or the cost incorporated in financing plan, this increase will be referred to the independent engineer for comments on whether this increase in expenditure is reasonable. The port authority will then take a decision on approving the enhanced cost.
With the aim of ensuring a more balanced risk allocation, the revised MCA will have a provision for the approval of discounts on ceiling rates for the recovery of revenue share. At present, the revenue share is payable to ports based on gross revenue calculated as per tariff ceilings even if the concessionaire is giving discounts. It is proposed that the concessionaire be entitled to request port authorities to consider and approve discounts and pay the revenue share on the discounted tariff. The revenue from storage charges will also be excluded while computing gross revenue for the purpose of revenue sharing. According to Balasubramanian, “A clarification on the procedures for reckoning of discounts and apportioning of composite revenue between storage and non-storage, in consultation with the established procedures of the comptroller and auditor general would be useful for port trusts and investors as this could be contentious in the absence of standardisation.”
Finally, the revised agreement has proposed a few amendments to the definition of “change of law”. According to the existing MCA, a change in law excludes levies by the Tariff Authority for Major Ports (TAMP), environmental laws and labour laws, and increase in and imposition of taxes. Since these changes can affect the viability of a project, the proposed MCA allows for all changes in law, except the imposition of any new direct tax. This will help the concessionaire get compensation for all major changes in the law.
The government’s intention of revising the MCA for private projects at major ports is a welcome step. Going forward, the challenge will be to ensure that the policy implementation guidelines are robust, investor friendly and equitable. The timely adoption of this agreement will be a key factor in addressing the longstanding demands of private terminal operators as well as attract greater private participation in the sector.