Constraining Factors: Slow momentum in financing and PPPs

Slow momentum in financing and PPPs

Financing is a critical aspect for the success of infrastructure sector projects, and the port sector is no exception. Besides public investment, the private sector too has played a significant role in funding port projects. In fact, private investment is estimated to account for over 80 per cent of the total investment in the port sector in the past two-three five-year plans. Besides complementing public investment, private players have brought in high standards of efficiency and improved quality of service in the sector.

The past few years though have been quite challenging for infrastructure sectors including ports in terms of securing funds and attracting private participation because of a number of reasons such as delays in obtaining clearances, land acquisition, poor contract structuring, etc. However, the government has become proactive and is taking several initiatives, which herald better times for port financing.

A review of the financing landscape for port facilities in the country…

Financing trends: Key sources and recent developments

Under Union Budget 2019-20, the Ministry of Shipping (MoS) received an allocation of Rs 19.03 billion (budget estimates). The allocation is higher than the budget estimate of Rs 18.81 billion and lower than the revised estimate of Rs 19.39 billion for 2018-19. Under the 2019-20 budget, the shipping ministry reiterated its emphasis on the development of India’s blue economy and proposed Rs 5.5 billion for the Sagarmala programme. The allocation was more than the revised estimate of Rs 3.8 billion allocated in 2018-19. Besides budgetary support, banks are also an important source of funds. Over the past five years (2014 to 2018), bank credit to the infrastructure sector (including ports) increased at a compound annual growth rate of 1.49 per cent.

External commercial borrowings (ECBs) have been an important source of port financing as well. Amidst constrained financing activity, ECBs picked up substantially in 2017-18 and stood at $1.3 billion ($0.73 billion in 2016-17 and $1.01 billion in 2015-16). During the first half of 2018-19, ECBs for funding of port projects stood at $282.97 million. This includes Adani CMA Mundra Terminal Private Limited’s (ACMTPL) $37.5 million ECB issuance in April 2018, Adani International Container Terminal Private Limited’s $180 million issuance in August 2018 and ACMTPL’s $25 million issuance in September 2018. Meanwhile, during the past four-five years, multilateral financing agencies and private equity players have kept their distance from the sector. New funding options such as infrastructure investment trusts and debt funds are expected to take off in the near future. For shipyards, initial public offerings have been resorted to in recent times.

New financing avenues are also taking shape. Dedicated financing platforms such as Hindustan Infralog Private Limited (HIPL) look promising. HIPL is a joint venture between DP World and the National Investment and Infrastructure Fund that has been incorporated as an investment vehicle to invest up to $3 billion in ports, terminals, logistics and other related sectors. In July 2018, HIPL acquired a 90 per cent stake in Continental Warehousing Corporation (Nhava Seva) Limited. More such transactions are likely to be witnessed in the future.

Private sector participation

Public-private partnership (PPP) projects in the port sector have been attempted on almost all the variants of the build-operate-transfer (BOT) model. New ports are being primarily developed on a build-own-operate-transfer or build-own-operate-share-transfer basis. The projects have been typically executed through the setting up of special purpose vehicles. The concession period for port projects is usually 30 years. However, the PPP models for major and non-major ports differ in some respects. While the major ports have regulated tariffs, the non-major ports are free to set their own tariff structure.

For the major ports segment, PPP projects involving a capacity of over 280 million tonnes per annum are currently operational. These projects have been developed at an investment of over Rs 240 billion. At the non-major ports, private participation has been invited for setting up new ports and captive jetties/ terminals and for converting existing small ports to all-weather ports. In the past, most of the ports developed at the state level were on a PPP basis. These include Pipavav port (1996), Mundra port (1998) and Krishnapatnam port (2008).

Foreign players too have forayed into the PPP space in the port sector. 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.

Key policy moves

In a major development, in January 2018, the cabinet approved the revised model concession agreement (MCA) for PPP projects at the major ports. The amendments are expected to make port projects more investor friendly and make the investment climate more attractive. The MoS has taken into account the recommendations made in various reports by the NITI Aayog (2010), the Indian Ports Association (2015) and the Kelkar Committee (2015), while modifying the MCA. Overall, the amendments in the MCA for private projects have been made to ensure equitable allocation of project risks, introduce provisions to handle unforeseen circumstances, remove ambiguity in the existing provisions and to attract more private investment.

In a major development, in March 2019, the Tariff Authority for Major Ports (TAMP) issued Tariff Guidelines, 2019, for determination of tariffs for BOT operators operating at  major port trusts (previously governed by the 2005 tariff guidelines). The new port tariff policy aims to address long-standing issues with a 2005 revenue model that had older terminals at a disadvantage vis-à-vis new terminals. The new guidelines have received a mixed response.

Experience with PPP: Key lessons learnt

Some of the past PPP projects in the port sector have resulted in some key learnings for all the stakeholders. These are as follows:

  • The success of a bulk cargo handling port lies in the availability of adequate rail infrastructure. With respect to funding port projects, especially bulk cargo handling port facilities, one of the key factors being taken into consideration by the financiers is the availability of adequate rail connectivity.
  • The absence of a sufficient number of rail lines or suboptimal usage of existing lines is bound to affect the port’s efficiency levels. Hence, merely developing the port without developing rail/road infrastructure is likely to be detrimental to the project in the long run.
  • Lack of clarity in project contracts can cause projects to fail. Clearly defined risks and responsibilities, both for the concessioning authority and the concessionaire, are of prime importance.
  • Supervision of the fulfilment of condition precedent by the concessioning authority is critical.
  • A dispute redressal mechanism is required to avoid inordinate delays in the event of a default, either by the concessionaire or the concessioning authority.
  • Restructuring of bids (while reinviting bids) is also a viable option to award works

The way forward

According to India Infrastructure Research, projects worth about Rs 6.59 trillion planned to be undertaken through private participation are on the anvil at Indian ports. There are substantial opportunities under the Sagarmala programme. Given the huge scale of capacity augmentation plans for the maritime sector, the future certainly looks bright. According to industry stakeholders, amendments to the MCA are a welcome step. However, in the future, the challenge will be to ensure that policy implementation guidelines are robust, investor friendly and equitable. w

Priya Mishra