Funding Hurdles: Investors wary of financing port projects

Investors wary of financing port projects

To improve efficiency in operations and supplement public investments, private participation in the Indian port sector is critical. Public-private partnership (PPP) projects in the sector have been attempted on almost all variants of the build-operate-transfer model. Private participation has been sought in setting up new ports and captive jetties/terminals, mechanising facilities, and converting existing small ports to all-weather ports. With 100 per cent foreign direct investment and other favourable policy initiatives, the sector has attracted a number of foreign private players including PSA International, Dubai Ports World and APM Terminals. Of the total traffic of 679.37 million tonnes (mt) handled by the major ports in 2017-18, PPP operators handled 165.38 mt, a share of 24.34 per cent. 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) (29 per cent), followed by Visakhapatnam and Chennai ports (18 per cent each).

Investor views

With respect to funding port projects, there are certain important factors that are taken into consideration by financiers. A key factor considered while funding bulk cargo handling port projects is the presence of adequate rail connectivity. The cargo profile of the proposed port project is also an important determinant. Other key factors are detailed construction plans of the project, availability of support infrastructure, scale and traffic potential, and future capacity expansion plans.

In terms of implementation mode, an engineering, procurement and construction (EPC) contractor does not have to deal with traffic and business risks and has control over the project cost for a certain period of time. With respect to a choice between EPC and PPP modes, lenders/ investors usually prefer financing viable PPP projects. That said, the final choice between the two modes depends upon the amount of risk that the contractor is willing to take. PPP models also differ in some respects for the major and non-major ports. While private terminals at the major ports have regulated tariffs, the non-major ports are free to set their own tariffs. In this respect, financiers find funding projects at non-major ports more attractive.

Case study: Dighi Port Limited

The success of a bulk cargo handling port lies in the availability of adequate rail infrastructure. The absence of sufficient number of rail lines or the suboptimal usage of existing lines is therefore bound to affect the port’s efficiency levels.

A case in point is Dighi Port Limited’s (DPL) present situation. DPL is a special purpose vehicle incorporated by Balaji Infra Projects Limited, Infrastructure Leasing and Financial Services Limited and Tara India Fund III for the development of Dighi port. In the past couple of years, the port has been operating at low utilisation levels due to lack of rail (and road) connectivity. Owing to the low traffic throughput at the port and the inability of the operator (DPL) to pay its bank dues, the port has been brought under the stressed asset resolution process. In April 2018, DPL was declared bankrupt and taken to the National Company Law Tribunal (NCLT) after it failed to pay off a loan raised from a consortium of 15 lenders led by the Bank of India. The company owes the consortium of banks Rs 26.07 billion. In February 2019, the Committee of Creditors approved the resolution plan submitted by JNPT to buy DPL. The port trust has quoted an upfront payment of Rs 6 billion, besides capital infusion. Meanwhile, approval of the lenders’ panel will be submitted to the NCLT for ratification. Currently, the investors have their eyes on how the valuation process of Dighi port progresses.

The way forward

As per Ministry of Shipping (MoS) estimates, cargo traffic and capacity are expected to increase to 2,500 mt and 3,500 mt respectively by 2025. Correspondingly, an equally significant increase in investment levels will be needed. As in the past, the bulk of the investment (especially with respect to containers) is expected to come from the private sector.

In light of the MoS’s ambitious targets, the private sector will have to make a huge investment contribution. For project financing, one of the key recommendations by lenders is the need to  tap other emerging sources of financing including external commercial borrowings and sovereign funds. Besides, financing through infrastructure investment trusts and infrastructure debt funds could also be explored.

On the policy front, the recent approval of the amendments in the model concession agreement for PPP projects at the major ports is expected to encourage greater private sector participation. Besides, to provide a further impetus, the government has approved the draft Major Port Authorities Bill, 2016, replacing the existing Major Port Trusts Act, 1963. 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 ports; and constitute an adjudicatory board for dispute adjudication among the major ports, PPP concessionaries and captive users. Going forward, the challenge will be to ensure effective implementation of policies in a time-bound and equitable manner.

With inputs from Asit Ranjan Sikdar, Vice President, Project Advisory and Structured Finance, SBI Capital Markets, and Jens-Oliver Schuenzel, Vice President, KfW IPEX-Bank, at a recent India Infrastructure conference