Prospects Despite Challenges: Private participation at Indian ports

Private participation at Indian ports

Private participation is increasingly being sought at Indian ports to facilitate development. With 100 per cent foreign direct investment being permitted in the sector along with other supportive policy measures by the government, the sector has attracted considerable private investment, from both foreign and domestic players. Private investment accounted for over 80 per cent of the total investment in the port sector in the Tenth and Eleventh Five Year Plans, and in the Twelfth Plan the share is estimated at over 85 per cent. Besides complementing public investment, private players have brought in high standards of efficiency and improved quality of service in the sector.

According to the Ministry of Shipping (MoS), as of March 2017, 33 public-private partnership (PPP) projects entailing a total investment of Rs 178.18 billion have been completed at major ports and have added a capacity of 277 million tonnes per annum (mtpa). Of these projects, the liquefied natural gas (LNG) terminal project (Cochin port) entails the maximum investment at Rs 41.82 billion, followed by the offshore container terminal at Mumbai port at Rs 13 billion.

Of the total traffic of 606.46 million tonnes (mt) handled by major ports in 2015-16, the share of PPP operators is quite significant. PPP operators handled 156.21 mt of traffic at major ports, accounting for a share of 26 per cent in total traffic handled. A port-wise analysis shows that the share of PPP operators in total cargo traffic handled was the highest at the Jawaharlal Nehru Port Trust (JNPT). Private container terminal operators handled 3.05 million twenty-foot equivalent (TEUs), a share of 68 per cent in the total container traffic handled by the port.

At the state level, private participation has been invited for setting up captive jetties/terminals, developing new ports and converting existing small ports to all-weather ports. Private ports are recording higher growth rates, driven by superior efficiency levels, deeper draughts, a diversified portfolio, etc. Adani Ports and Special Economic Zone Limited (APSEZL) is the first commercial private port in the country to cross the 100 mt cargo traffic mark. Non-major ports like Krishnapatnam and Gangavaram, which were commissioned as recently as 2008, have already overtaken some of the major ports in terms of absolute traffic volumes.

In terms of mode of implementation, build-operate-transfer (BOT) (and its variants such as the design-build-finance-operate-transfer [DBFOT]) is the most popular format for undertaking projects at major ports. Meanwhile, states are following different formats for inviting private participation – build-own-operate-transfer (BOOT) (Gujarat); build-own-operate-share-transfer, build-own-operate (Odisha); DBFOT (Kerala); BOOT (Maharashtra), etc. Vizhinjam port in Kerala to be developed by APSEZL, is the first port project in the country to be given viability gap funding of Rs 8 billion.

Upcoming projects

As of March 2017, 20 PPP projects (total investment of Rs 223.63 billion) are under implementation at major ports. On completion, these projects will add a capacity of 242 mtpa. The development of the fourth container terminal at JNPT entails the maximum investment at Rs 79 billion, followed by an LNG terminal by Indian Oil Corporation Limited at Kamarajar port on a captive basis at Rs 51 billion.

In addition, the government plans to develop six new ports under the Sagarmala programme. These are Vadhavan in Maharashtra, Sagar Island in West Bengal, Paradip Outer Harbour in Odisha, Enayam and Sirkazhi in Tamil Nadu and Belekeri in Karnataka. Technoeconomic feasibility reports have been prepared for these six new port locations.

At the state level, according to India Infrastructure Research, 12 new ports involving an investment of around Rs 380 billion are coming up through private participation. The maximum number of projects is coming up on the BOOT model, followed by DBFOT. Odisha accounts for a 30 per cent share of the total investments, with Astaranga port alone accounting for 65 per cent of the total investments proposed in the state.

Key issues and challenges

Port contracts often do not clearly define risks and responsibilities for the two parties involved in the process, leading to a lot of room for ambiguity and dispute. One of the major reasons for delays in the commissioning of port projects has been the non-fulfilment of conditions precedent by the concessioning authority. The lack of a proper dispute redressal mechanism further reduces investor interest in the sector.

As per the model concession agreement (MCA), major ports are required to hand over physical possession of the project site and backup area (or the port’s assets) to the concessionaire within a stipulated time frame, as indicated in the concession agreement. However, there have been considerable delays in handing over of the project site/land. The projects involving the development of berth no. 7 at Mormugao port, and the development of West Quay-6 at Visakhapatnam port witnessed delays of over 790 days and 341 days, respectively, due to delays in handing over of project sites and backup areas.

Meanwhile, several port-specific projects have been stuck due to delays in the grant of clearances, which is a prerequisite before work can be initiated on a project. The required clearances relate to those from the Ministry of Environment, Forest and Climate Change and pollution control boards, coastal regulation zone clearances, those related to land acquisition, etc. Due to multiple approvals 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. This has led to the cancellation of projects, developers backing out from projects and delays in commissioning. Some of the big projects affected due to delays in obtaining environmental clearances are the development of the North Cargo Berth no. IV at V.O. Chidambaranar (VOC); an oil jetty to handle liquid cargo and ship bunkering terminal at Kandla; iron ore export terminal at Mormugao; and a mechanised coal handling facility at berth no. 11 at Mormugao.

Meanwhile, progress on greenfield ports has been extremely slow due to issues of obtaining clearances, land acquisition, etc.

The way forward

The government has shown strong intent in resolving the long-pending issues of the private players. The shipping ministry is the process of revising the MCA of 2008. 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 and 26 per cent thereafter, for the next three years. Thus, the private party will be free to exit the project after six years.  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 upon completion of one year of operations, for refinancing its debt. The new MCA also has the provision for a mid-term review of the concession agreement.

According to industry stakeholders, the timely adoption of this agreement will be a key factor in addressing the long-standing demands of private terminal operators and will attract greater private participation in the sector. The exit clause will ensure the unlocking of capital and is a welcome step. However, there should be clarity on the type of investors that would be allowed to come in (port players, infrastructure investors, financial investors) and a clear procedure (in terms of eligibility, security deposit, etc.) for the same should be established.

Another major initiative on the anvil is the Major Port Authorities Bill, 2016. The bill has been conceived by the government to replace the Major Port Trusts Act, 1963, to enable port authorities to become flexible and autonomous as well as to respond fast to changing situations. The need for government approvals for raising loans, appointment of consultants, execution of contracts and creation of service posts has been dispensed with. The board of the port authority has been granted the power to raise loans and issue security for the purpose of capital expenditure and to meet working capital requirements. It has also been empowered to fix the scale of rates for services and assets.

The regulation of tariffs by the Tariff Authority for Major Ports has been removed. According to industry experts, the new bill is a bold initiative and a welcome step. However, there are still certain areas related to capital reserves, remuneration, borrowings, etc., that call for review and clarity.

Going forward, these new policy initiatives need to be implemented in a timely manner to realise the full benefits. The challenge is to ensure that the policy framework for port sector is robust, investor friendly and equitable so as to attract greater private participation.