Sector Review: Undergoing a sea change

Undergoing a sea change

Over the past two decades, the port sector in India has undergone significant changes with the introduction of new policies, amendments to existing policies, increase in cargo traffic, spurt in private participation, and the development of new greenfield ports. The capacity of major ports crossed the 1 billion tonne mark in 2016-17 while over 200 non-major ports have a capacity of over 800 million tonnes per day (mtpa) (2016-17).

The launch of the Sagarmala programme has injected the much-needed optimism in the sector. There has been remarkable growth in container traffic, and a renewed focus on coastal shipping and inland water transport (IWT) on a much bigger scale. However, certain issues are still impeding sector growth. Land acquisition is a challenge, especially for greenfield projects. Contractual issues also require immediate attention. Congestion at ports and higher waiting times for vessels are the other long prevailing issues.

Indian Infrastructure takes a look at the significant trends and developments in the port sector in the past 20 years…

Port traffic: Tremendous potential in store

The significance of port development emanates from the fact that ports handle more than 95 per cent of the international trade by volume and around 70 per cent of trade by value. Cargo traffic at Indian ports grew at a compound annual growth rate (CAGR) of 7.05 per cent from 2003-04 to 2017-18, while capacity at Indian ports increased at a CAGR of 9.46 per cent from 2009-10 to 2016-17.

Major ports

During the late 1990s, Indian ports were operating at near saturation levels in terms of capacity, resulting in high pre-berthing and turnaround times. The over-utilisation of port capacity was a result of low draught levels, insufficient berthing capacity, and low levels of containerisation, among others.

Since then, the major ports have come a long way in terms of the cargo traffic handled. Traffic at major ports has grown at a CAGR of 5.36 per cent from 251.72 million tonnes (mt) in 1998-99 to 679.36 mt in 2017-18.

In terms of commodities handled, the shares of petroleum, oil and lubricants, coal and containers have decreased from 42.68 per cent to 35.87 per cent between 1998-99 and 2017-18 while the share of coal has increased from 15.32 per cent to 21.47 per cent during the same period. The share of containers has increased significantly from 9.45 per cent to 19.67 per cent during this period.

Although containerisation started late in India, around the late 1990s, container traffic has grown significantly since. The share of container trade volume in total merchandise trade has increased from 45 per cent in 2004 to 55 per cent in 2016. The Jawaharlal Nehru Port Trust with 81.97 mt of container handling capacity accounts for the lion’s share of 44 per cent in total container traffic (2016-17), followed by Chennai port at 23 per cent (44.85 mt capacity; 28.85 mt traffic).

In terms of capacity addition, major ports have added a capacity of 919.12 mt between 2007-08 and 2017-18. On the efficiency front, there has been a marked reduction in the average turnaround time on port account, from 2.63 days in 2007-08 to 2.05 days in 2016-17. Similarly, the average pre-berthing time on port account has reduced significantly from 11.4 hours (2007-08) to 5.77 hours (2016-17).

Non-major ports

The non-major ports have gained significance in terms of cargo traffic handled only in the past decade. Traffic at the non-major ports grew at a CAGR of 11.13 per cent from 120.84 mt in 2003-04 to 529.58 mt in 2017-18. Till 2008-09, the non-major ports accounted for an average share of only 27 per cent in the total traffic handled at Indian ports. Their share has increased significantly since and, at present, the non-major ports account for more than 40 per cent of the total traffic handled.

Gujarat has emerged as the country’s premier maritime state in terms of operational port capacity, traffic and private sector investment. The state has the longest coastline of 1,600 km and more than 40 ports including one major port and many minor-intermediate ports. Cargo traffic at Gujarat’s non-major ports has grown at a CAGR of 7.65 per cent from 205.54 mt in 2009-10 to 370.77 mt in 2017-18. In terms of capacity, the state’s maritime ports registered a CAGR of 10.02 per cent, increasing from 243.64 mt in 2009-10 to 523 mt in 2017-18.

Port financing: Impetus to private sector participation

Private participation in Indian ports began in the 1990s, primarily to improve efficiency in operations and supplement public investments. Until then, the government’s policies for the port sector were guided by the principle of public sector dominance and self-sufficiency.

Since the late 1990s, the government has been making exhaustive attempts to lay down norms for privatisation of port facilities.

On a national level, the Ministry of Shipping (MoS) (the then Ministry of Surface Transport), formulated the first set of comprehensive guidelines for private investment in 1996. Under these guidelines, leasing of port assets, the construction or creation of new assets, leasing of equipment for port handling and floating crafts, and pilotage and captive facilities for port-based industries were identified as areas for private sector participation. The next major initiative was taken in 1997 when an independent regulatory body, the Tariff Authority for Major Ports, was set up. Besides, a host of fiscal incentives were extended to attract private investment in the 1990s. In 1998, the government allowed joint ventures to be set up to develop port facilities. Reforms allowing a 100 per cent (from the earlier 74 per cent) foreign direct investment (FDI) with automatic approval followed in the same year.

With 100 per cent FDI and other policies in place, the sector has attracted a lot of players including established foreign majors. Key foreign players in the sector include PSA International, the AP Moller-Maersk Group, DP World, and the Israel Port Company.

The first major privatisation project was undertaken by the P&O Group in 1997 with a 30-year build-operate-transfer concession for the development of Nhava Sheva Inland Container Terminal Limited. This was followed by the development of container terminals at V.O. Chidambaranar port (former Tuticorin port) (PSA Corporation), Chennai (P&O Group) and Visakhapatnam (JM Baxi and DP World).

In June 2000, the government formulated the model concession agreement (MCA) to promote private participation in the sector. In 2001, a model for corporatising ports was introduced to operate them along the lines of a corporation. Kamarajar port (formerly known as Ennore port) was the first port to be set up on this model. Till date, no other port has been corporatised.

A major boost to the sector came in July 2009, when the central government empowered all port authorities to award contracts on a public-private partnership (PPP) basis. The government also finalised the draft Major Ports Regulatory Authorities Act, 2009, to implement uniform standards of performance and ensure uniformity in rates and practices.

With a view to making port projects more investor friendly and the investment climate more attractive, in early 2018, the central government approved the long-awaited demand for amendments in the MCA for PPP projects at major ports. According to India Infrastructure Research, as of June 2018, 43 PPP projects are in the preliminary/planning and bidding stages 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 mtpa.

The game changers: Policies and government initiatives that shaped the sector

Most of the policies formulated in the 1990s were dedicated to improving capacity utilisation of the major ports, increasing private sector participation and developing private/greenfield ports. The big leap came in 2005 when the government launched the National Maritime Development Programme (NMDP). Private investments were encouraged in areas where operations are primarily commercial in nature such as construction, management and operation of berths/terminals. Port projects were first conceived and developed at the port level, and then forwarded for inclusion under the NMDP. However, the NMDP had no jurisdiction over non-major ports.

Post 2010, a slew of initiatives were taken by the government to boost growth in the sector. To provide major ports with a level playing field vis-à-vis non-major ports, the government introduced the new Guidelines for Determination of Tariff at Major Ports, 2014. With this, additional flexibility was granted to the major ports in tariff fixation.

In July 2015, the government’s most ambitious programme for the port sector till date, Sagarmala, was launched with a much wider scope than the NMDP. The programme aims to implement 605 projects involving an investment of Rs 8.7 trillion by 2035. This is expected to offer huge opportunities to all stakeholders.

In addition, the ‘Make in India’ iniative offers various opportunities in the shipbuilding, ship repair, port development and other segments.

In the past two years, several new policy measures were introduced by the government. Steps were taken to provide greater autonomy to boards of major port trusts, revise the MCA, relax cabotage restrictions for container transshipment ports, revamp the Merchant Shipping Act, 1958, declare 106 inland waterways as national waterways (NWs), allocate 2.5 per cent of the Central Road Fund for the development and maintenance of NWs, grant infrastructure status to the shipbuilding segment, etc.

Greenfield port development: Adding new capacity

In the late 1990s, the focus of private investors shifted to the development of minor ports, which had short-gestation periods and strong revenue streams. The main thrust of the government’s new strategy was to streamline the activities at the existing ports, and increase productivity and add capacity by roping in private funds to build new minor ports. In 2002, Pipavav port was the first non-major port in the country to be set up with 100 per cent private investment. The success story of Pipavav port gradually increased private interest in developing greenfield ports. Currently, a number of private ports are operational such as the ports of Mundra, Dahej, Dhamra, Dighi, Gangavaram, Gopalpur, Hazira, JSW Jaigarh, Karaikal, Kattupalli and Krishnapatnam.

Due to the growing potential of the sector, a number of global and Indian private companies have expressed interest in the development of new ports on a PPP basis. These ports are expected to contribute to capacity addition and increase cargo traffic.

Post 2005, the government announced several policies and projects to attract private investment in the development of greenfield ports. Over the past decade, the government has announced plans to develop more than 20 new non-major ports involving an investment of over Rs 875 billion. Upon completion, these projects are expected to add over 645 mt of capacity.

Shipping industry: Initiatives and incentives for holistic growth

Back in the 1990s, the shipping industry urgently needed a large dose of incentives to stay afloat in international waters. In view of the increasing competition and globalisation of trade, it was imperative to provide a level playing field to domestic shipping players fighting for their very survival.

The Indian shipping industry received due attention in the late 1990s. In July 1997, with the formation of the National Shipping Policy Committee (Pinto Committee), the shipping industry was brought into focus. Based on the recommendations of the committee, a new shipping policy was framed in January 2000. Following this, specific shipping-related proposals surfaced in the Union Budget 2000-01. In light of the Indian shipping industry’s demand for a level playing field vis-à-vis their foreign counterparts, the tonnage tax regime was introduced in 2004.

The shipping industry has come a long way since. As of July 31, 2018, the Indian shipping industry had a fleet of 1,389 vessels of 12.74 million gross tonnage (GT) compared to 484 vessels of 6.79 GT in 1998 (as of December 31).

IWT and coastal shipping: Huge untapped potential in the cheapest transportation mode

The history of IWT and coastal shipping in India can be summarised in a single phrase – much potential but little action. Despite the awareness that IWT and coastal shipping have tremendous potential, the government did precious little about it during 1990s. The government’s attitude coupled with the high capital cost of building the requisite infrastructure and lacklustre private sector participation led to an obvious outcome – a negligible share of cargo transported through waterways in the country.

The National Transport Policy Committee Report, 1980, was a game changer in the evolution of the IWT segment. Based on the recommendations of the committee, the Inland Waterways Authority of India was formally set up in October 1986. It was only after 2000 that the government started taking specific measures to expedite the development of inland waterways. With these waterways being granted infrastructure status in the early 2000s, the government’s efforts finally seem to fall in place. The launch of the Jal Marg Vikas Project (JMVP) and the declaration of 106 new waterways gave the IWT segment a further push. Under the JMVP, about Rs 54 billion will be invested in increasing the least available depth of NW-1 and setting up four multimodal terminals of 7.16 mtpa capacity, among others.

Emerging areas of growth: Massive opportunities across segments

Areas such as shipbuilding, cruise shipping and port connectivity have received their share of interest in the past few years only.

Shipbuilding, as a separate industry, came into focus around the late 2000s. Historically, the shipbuilding industry shifted from the developed to the developing countries. And India, with its cost advantage in labour, had opportunities to emerge as one the major shipbuilding nations. In December 2015, the government approved the Shipbuilding Financial Assistance Policy for Indian shipyards. The policy provided financial assistance of Rs 40 billion to the shipyards for a period of 10 years for the contracts secured between April 1, 2016 and March 31, 2026.

Another focus area for the government during the 2000s was cruise shipping. The Union cabinet approved the adoption of the Cruise Shipping Policy in June 2008. The policy provided for hassle-free customs clearance, dedicated cruise shipping terminals and a conducive fiscal regime, among other things. At present, the Mumbai, Mormugao, New Mangalore, Chennai and Cochin ports have cruise facilities. Further, Mumbai and Chennai ports are setting up new international cruise facilities. These facilities are expected to be commissioned in 2020.

Port connectivity through road and rail is also being undertaken on a fast-track basis. According to India Infrastructure Research, 136 port connectivity projects have been identified (as of February 1, 2018). These projects are expected to entail an investment of over Rs 386 billion. At present, construction work on 45 projects, at an investment of Rs 150.18 billion, is under way.

In order to execute last-mile rail connectivity projects and internal rail projects of the major ports more effectively and efficiently, a special purpose vehicle, Indian Port Rail Corporation Limited (IPRCL), was incorporated under the administrative control of the MoS.  As of February 1, 2018, IPRCL has a portfolio of 44 projects involving an investment of Rs 194.73 billion. These projects offer ample opportunities for contractors, consultants and material providers (steel, cement, etc).

The way forward

The ports and shipping industry plays a vital role in the country’s trade and commerce. With the majority of global trade carried out via sea, developing strong, well-functioning maritime transport infrastructure is a key element of economic growth. In the past two decades, private investment in the sector has increased significantly. The country has witnessed both successes and failures, though the lessons learnt from the failures have been incorporated into policy reforms.

In all, the outlook for the sector seems promising with the government planning to evolve an economic model of port-led development to utilise the country’s long coastline. Given Sagarmala’s scope and the huge investment requirement, the key lies in effective and timely project execution. Policy initiatives too seem to be finally falling into place. The outcome now depends on how far and how quickly the government implements them.