Set for a Sea Change: Sagarmala likely to be a game changer, but implementation will be the key

Sagarmala likely to be a game changer, but implementation will be the key

The maritime sector is an important contributor to the country’s growth, accounting for about 95 per cent of the export-import (exim) trade by volume and 70 per cent by value. The past few years have been challenging for the sector with weak global demand, and negative export and import growth rates. Indian port traffic witnessed single-digit year-on-year (YoY) growth rates from 2011-12 to 2015-16. Though capacity addition has picked up pace at major ports, progress on the development of new non-major ports remains tardy.

Nevertheless, the government is being proactive and is leaving no stone unturned to ensure sector growth. The port sector was a hive of activity during the past year and a half with the introduction of several important policy measures. These were related to the introduction of the Major Port Trust Authorities Bill, 2016 (to give more autonomy to the boards of major port trusts), the introduction of the revamped Merchant Shipping Bill, 2016; repealing of the Merchant Shipping Act, 1958, and the Coasting Vessels Act, 1838; the relaxation of cabotage restrictions for container transshipment ports; an 80 per cent discount scheme for two years on vessel-related and cargo-related charges for coastal transportation through roll-on, roll-off ships at major ports; etc. Steps were also taken to promote the ease of doing business at ports. While these initiatives are yet to turn investors bullish, there have certainly been gains on the project implementation front.

The Indian port sector is set for its next phase of growth over the next decade or so. The successful implementation of the central government’s biggest programme for the maritime sector to date, the Sagarmala, can be a game changer for the sector in terms of logistics cost savings, infrastructure creation, infrastructure modernisation, employment creation, etc.

While the roadmap for the programme is still evolving, progress made towards project implementation is quite evident. With the launch of the National Perspective Plan (NPP) in April 2016, Sagarmala has moved from the planning to the implementation stage. However, the programme’s timely and successful execution requires a major role to be played by the private sector, and this, in turn, depends on resolving various regulatory and structural issues hampering the sector.

Sector growth and trends

  • From 2011-12 to 2015-16, cargo traffic at Indian ports grew at a compound annual growth rate (CAGR) of 4.08 per cent, to reach 1,072 million tonnes (mt). The growth was led by non-major ports, which witnessed a CAGR of 7 per cent, compared to only 2 per cent for major ports. The share of non-major ports increased from 39 per cent to 43 per cent during the same period.
  • In terms of YoY growth, there was only a 1.9 per cent increase in 2015-16, compared to 8 per cent in the previous fiscal year. Non-major ports were affected more than major ports and had a negative growth of 1.01 per cent compared to a 13 per cent YoY growth during the previous year. The performance was largely affected by falling iron ore volumes as well as declining growth in coal traffic.
  • In 2016-17, major ports handled 647.43 mt of traffic, registering a YoY growth of 6.79 per cent, as against 4.32 per cent during 2015-16. Reportedly, non-major ports were slightly behind the major ports, with a growth of 4 per cent. The growth in traffic at major ports was attributed to an increase in iron ore, petroleum, oil and lubricants and container traffic. Fertilisers and coal witnessed negative growth rates of -23.88 per cent and -15.53 per cent respectively.
  • As per the latest official estimates available for non-major ports for 2016-17 (till September 2016), traffic stood at 234.32 mt, a growth of 4.9 per cent over the corresponding period of the previous year.
  • So far, port development has primarily taken place on the west coast. These ports accounted for 63 per cent and 57 per cent of total traffic and capacity, respectively, at Indian ports in 2015-16. However, recently, ports on the east coast have started showing higher growth rates than those on the west coast. Between 2011-12 and 2015-16, traffic in east coast ports such as Dhamra, Krishnapatnam and Kamarajar increased at a CAGR of 31 per cent, 23 per cent and 21 per cent respectively.
  • In terms of infrastructure, however, there was a record capacity addition at major ports. During 2015-16 and 2016-17, major ports added a capacity of 94 million tonnes per annum (mtpa) and 100.37 mtpa respectively. With this, the total capacity at major ports has crossed the 1 billion tonne mark, reaching 1,065 mtpa as of March 2017. At the state level, the capacity of the private port at Mundra increased to 5.5 million twenty-foot equivalent units (TEUs) with the commissioning of the fourth container terminal. On the flip side, the pace of greenfield project execution continues to remain tardy.
  • Ports are exploring new business areas to diversify their portfolio and reduce business risks, with roll-on, roll-off and liquefied natural gas terminals, smart port cities, and port-based special economic zones emerging as new areas of growth. Of the total target of 91.5 MW of solar power projects at the 12 major ports, power projects totalling 13.7 MW are operational at eight major ports.

The way forward

  • The long-term outlook for the sector remains positive, backed by a series of government initiatives taken recently. As per estimates of the Ministry of Shipping (MoS), cargo traffic and capacity are expected to increase to 2,500 mt and 3,500 mt respectively by 2025.
  • In the short run, the overall exim traffic is expected to grow, though at a modest rate, with a slight increase in global trade projections.
  • With regard to commodities, the increase in domestic coal production is expected to continue, which will affect coal imports negatively. Likewise, an increase in the production of iron ore could lead to a decline in iron ore traffic at ports. However, this may be compensated for by an increase in the coastal traffic of these commodities.
  • Unfortunately, several issues continue to hamper growth. Land acquisition is a major concern, especially for greenfield projects. Ports at Rewas (Maharashtra), Machilipatnam (Andhra Pradesh), Astaranga (Odisha), etc., are yet to take off due to delays in land acquisition.
  • Often, contracts do not clearly define risks and responsibilities for the two parties involved, leading to a lot of room for ambiguity and dispute. Deadlines of a few big projects have been extended several times due to a lack of investor interest. The lack of adequate cargo evacuation facilities at ports has resulted in the increased cost of logistics for operators.
  • The requirement of multiple approvals, and sometimes the inordinate delay in securing them, has led to significant time and cost overruns in the past. High waiting times for vessels at ports caused by traffic congestion, strikes, etc., also adversely affect the shipping lines’ schedules and thus their profit margins. Roads continue to be the dominant mode for cargo evacuation, despite being costly and congested. Limited draught capacity of ports to accommodate large container vessels is another key concern.
  • Nevertheless, there is strong government intent to bring about a sea change. The recent policy initiatives – giving more autonomy to port trust boards, revising the model concession agreement, bringing some clarity on the tariff front, promoting coastal shipping and inland water transport, facilitating ease of doing business, forming dedicated special purpose vehicle (Indian Port Rail Corporation Limited [IPRCL]) for last-mile connectivity projects, etc., – are expected to revive investor interest and speed up the pace of project execution.
  • The goods and services tax, to be rolled out from July 1, 2017, is expected to have an impact across the board, and the maritime sector is no exception.
  • The launch of Sagarmala has brought optimism in the maritime sector. Given the broad scope and substantial investment requirement of the programme, the key lies in the effective and timely execution of projects.
  • The creation of adequate supporting infrastructure (connectivity, draught, etc.) as well as access to finance will be key enablers for projects and investment. Also, a coordinated approach to capacity addition is needed, as some regions have significant overcapacity, while others have low capacity. Looking eastwards is the way forward.