The economics of port projects is quite sensitive to a large number of external factors. This lends a fair degree of complexity to investments in such facilities. Factors such as trade cycles, for instance, have significant ramifications on a port’s business. In other words, investment risk in ports is high and has to be incorporated into the investment plan to churn out reasonable returns for the investor.
Factors at play
Typically, there is a set of standard variables that is taken into account while investing in ports. These include the length of the concession period, tariff structure, geographical location, presence of other ports nearby (competition), connectivity to the catchment area, access to a ready market, contracts for assured traffic, land availability and its use, time taken in securing requisite clearances and approvals, among others.
The length of the concession period has a significant impact on the investment plan, as it determines the horizon and scheduling of financing. In this regard, there is a notable difference between major and non-major facilities. For example, the Mumbai Maritime Board extends a concession period of up to 50 years, but at the major ports the maximum concession period is 30 years. A port’s tariff structure is another key factor in an investment plan. While currently there is lack of a level playing field between major and non-major ports in this regard, corrective policy initiatives are being taken. Recently, the Ministry of Shipping sought public/stakeholder comments for making improvements in the existing model concession agreement (MCA). Connectivity is another critical issue which eventually has a bearing on the utilisation rate of a facility, indicating the scale of business it is able to handle successfully.
Equity investment in Indian port projects has witnessed mixed participation from both domestic and international players. However, foreign players have been more inclined towards the container terminal segment, which moves very closely with international trade cycles. Some of the key foreign players that have invested in the country are DP World (Dubai), PSA International (Singapore), APM Terminals (the Netherlands) and Bollore (France). With regard to domestic entities, these are largely seen to be pursuing buyouts, which are either in operational ports or in greenfield projects. Stressed projects in particular have surfaced as a key segment on the back of successful financial turnarounds in cases such as Karaikal (turned around by Edelweiss). Dhamra and Kattupalli, which were taken over by the Adani Group, are also running successfully at present. This brings to the fore the importance of the managing entity and its bearing on the financial bottom lines of a port project. Some of the key private players in the sector are diversified business groups such as the Adani Ports and Special Economic Zone Limited (APSEZL), Essar Ports, the Tata Group and JSW Infrastructure Limied.
Meanwhile, it is important to acknowledge that the financial stress in some of the port projects has toned down the valuation expectations in recent times. This has received further buoyancy by the resolution process currently being pursued under the National Company Law Tribunal (NCLT) in the case of Dighi port. The first port project to reach the NCLT for debt resolution, Dighi port currently awaits a debt resolution plan by APSEZL. The first NCLT-routed process in the port sector has also shed some light on issues related to the veracity of data, timelines for resolution, ownership of land, and utility of contract agreements of the port.
The overall investment outlook is quite positive for the Indian port sector. The policy landscape is changing, further improvements are being proposed in the MCA, the first NCLT-routed debt resolution is in the final stages, and all this bodes well for investor sentiment towards port projects. According to industry experts, new ports are required at over 20 new locations to handle the expected trade in the future.
On the project level, it is important to examine the trade-off among the key variables that impact project economics as not all factors will be positive at a given port. Here, the investment strategy and expectations of potential investors will have to be aligned carefully. Project structuring will also play a key role – a well-structured project will attract genuine and patient capital in all likelihood.
Based on a presentation by Asit Sikdar, Vice President, Project Advisory and Structured Finance SBI Capital Markets, at a recent India Infrastructure conference