Forging Partnerships: PPP projects at Indian ports gaining traction

PPP projects at Indian ports gaining traction

Private participation is increasingly being sought at Indian ports to supplement public investments and bring in efficiency. Participation has been invited in the development of berths, container terminals, new ports, mechanisation of facilities, etc. With 100 per cent foreign direct investment and other favourable policy initiatives, the sector has attracted considerable private investment from several foreign players such as PSA International, Dubai Ports World, and APM Terminals.

Of the total traffic of 648.4 million tonnes (mt) handled by major ports in 2016-17, public-private partnership (PPP) operators handled 158.12 mt, accounting for a share of 24.38 per cent in total traffic handled. A port-wise analysis of traffic shows that the share of PPP operators in total traffic handled was the highest at the Jawaharlal Nehru Port Trust (JNPT) (27 per cent), followed by Chennai port (18 per cent) and Visakhapatnam port (16 per cent).

At the state level, private participation has been sought for developing new ports, converting existing small ports to all-weather ports and setting up captive jetties. The significant increase in the traffic handled by private ports has been driven by factors such as higher efficiency levels, deeper draughts, and a diversified portfolio. Among the non-major ports,  Mundra port (owned by Adani Ports and Special Economic Zone Limited) is the first commercial private port to cross the 100 mt traffic mark. Other non-major ports such as Krishnapatnam, in a span of 10 years, have already surpassed some of the major ports in terms of absolute traffic volumes.

In terms of mode of implementation, PPP projects have been attempted in almost all the variants of the build-operate-transfer(BOT) model (including design-build-finance-operate-transfer). However, the PPP models for major and non-major ports differ in some respects. While the private terminals at major ports have regulated tariffs, the non-major ports are free to set their own tariff structure.

Upcoming projects

According to India Infrastructure Research, 43 PPP projects are coming up (preliminary/planning and bidding) at major ports. These projects are estimated to entail an investment of over Rs 181 billion and will add a capacity of at least 125 million tonnes per annum (mtpa). In terms of the investment involved, the development of a floating storage regasification unit at New Mangalore port entails the highest investment at Rs 25 billion.

In addition to the upcoming projects, 19 projects involving investments of Rs 246.66 billion are already under construction at major ports, and will lead to a capacity addition of more than 232 mtpa. One of the much-awaited PPP projects that was recently inaugurated is JNPT’s fourth container terminal. Phase I of the project, developed at a cost of Rs 47.19 billion, was inaugurated in February 2018. Phase II is expected to be completed by November 2022 at an estimated cost of Rs 31.96 million.

Giving a further impetus to private participation, 18 new non-major ports, being developed on a PPP basis, are at various stages of implementation (preliminary/planning, bidding, awarded and under construction) and will add a capacity of over 803 mtpa upon completion.

Key constraining factors

Several port-specific projects have been held up due to delays in grant of clearances, a pre-requisite for work on the project to be initiated. Besides coastal regulation zone clearances, clearances are also required from the Ministry of Environment, Forest and Climate Change, and pollution control boards.

Due to the multiple approvals required and the inordinate delays in securing them, there is typically a lag of two years on average between the date of project award and commencement of construction work. This has led to cancellation of projects, developers backing out of projects and delays in commissioning. Some of the projects that have been affected due to delays in obtaining environmental clearances are the development of a multi-cargo berth at Paradip, an iron ore export terminal and a mechanised coal handling facility at Berth 11 at Mormugao, and an oil jetty to handle liquid cargo and a ship bunkering terminal at Kandla.

In addition, port contracts lack clearly defined risks and responsibilities for the two parties involved, leading to a lot of room for ambiguity and dispute. One of the major reasons for the delay 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. One of the projects that was affected due to contractual issues was the development of container berths 11 and 12 at Kandla port. The contract to set up a container loading facility at the port was awarded to ABG Infralogistics Limited in April 2006. However, in November 2012, the Kandla Port Trust (KPT) issued a termination notice to ABG after it failed to fulfil its obligation of handling the contractually mandated minimum guaranteed throughput. KPT later took over the failed container terminal from ABG after depositing a security amount of Rs 1.1 billion as lender’s dues. This was the first instance of a major port being asked to pay the lender’s funds on a failed PPP contract.

The way forward

The government has shown strong intent to resolve the pending issues of private players. The long-awaited demand for amendments in the model concession agreement (MCA) for PPP projects at major ports was finally met in January 2018. One of the salient features of the new MCA is the constitution of the Society for Affordable Redressal of Disputes-Ports (SAROD-PORTS) as a dispute resolution mechanism similar to the provision available in the highways sector. The constitution of SAROD-PORTS along with the provision of “change in law” is expected to have a positive impact on investment climate in the sector.

The other features of the new MCA include a simplified exit route for the concessionaire by way of divesting equity (up to 100 per cent) after the completion of two years from the commercial operation date, the extension of the provision of SAROD-PORTS for dispute redressal to the existing concessionaires by introducing a supplementary agreement to be signed between the concessionaire and the concessioning authority, the introduction of a complaint portal for port users and the introduction of a monitoring arrangement for keeping periodic status report of projects.

The cabinet has approved these changes for new projects too, for which bidding will take place in the future. Additionally, the cabinet has appointed a committee to examine whether the new MCA can be applied to the 12 stalled port projects, the total cost of which is estimated to be Rs 200 billion.

In a bid to provide a further impetus to private participation, the government has approved the draft Major Port Authorities [MPA] Bill, 2016, replacing the existing Major Port Trusts Act, 1963, to increase the performance efficiency of the 12 major ports on account of full autonomy in decision-making. The bill aims to constitute a Board of Port Authority for each major port in place of the board of trustees, make regulations for the purpose of operations, development and planning at the major ports, and constitute an adjudicatory board for adjudication of disputes among major ports, PPP concessionaries and captive users. In February 2018, the cabinet approved changes to the MPA Bill, 2016, which is pending in Parliament. After the enactment, the concessionaire will be free to fix the tariff based on market conditions.

According to industry experts, these changes are expected to make port projects investor friendly and make the investment climate in the sector more attractive. Going forward, the challenge will be to ensure that the policy implementation guidelines are robust, investor friendly and equitable.