A Costly Affair: Indian port charges and tariffs

Indian port charges and tariffs

The key charges at ports for a liner are marine charges and cargo handling charges. These charges are paid by the liners to the ports or terminals and typically account for 10-20 per cent of overall logistics cost for the trade, with the rest accounted for by ocean freight and inland freight.

While marine charges should ideally be low, actual marine charges have been as high as 30-40 per cent of overall cost in some cases. This is on account of operational inefficiencies, design issues, infrastructure gaps and low draught at ports, all of which push up expenses.

Marine charges at major ports have grown at a compound annual growth rate (CAGR) of 3-6 per cent during the past 10 years. Handling charges during the same period have grown at a CAGR of 5-9 per cent. Also, handling charges at major port trust-owned terminals or older terminals are 10-40 per cent lower as compared to the newer private terminals.

Port charges have continued to witness an increase due to the cost plus-based tariff setting, indexation with the wholesale price index, high manpower costs, etc. While operators/ ports can charge rates lower than the scale of rates specified, the discounts and rebates have not resulted in significant moderation of rates for liners. Even when high discounts are given on certain charges to attract new customers or cargo segments, penalties, detention and demurrage arising from port inefficiencies result in high costs at Indian ports.

Competing neighbouring ports are cheaper by 60-90 per cent with regard to marine charges. On the handling charges front, while some of the foreign ports are cheaper by up to around 50 per cent for transshipment volumes, they are comparable or higher in case of non-transshipment containers when compared to Indian ports. The actual deviation can be much higher on account of inefficiencies and other limitations at domestic ports.

With the cabotage relaxation in 2018, there has been some improvement in transshipment volumes at a few ports; however, high tariffs and other infrastructure issues have limited the benefits and many liners have cited high marine charges as the reason.

Regulatory framework

The Tariff Authority for Major Ports (TAMP) sets the ceiling rates for various services, though the actual rates charged can be lower. Tariff setting is based on the “cost plus return” principle, with several modifications over the years.

While tariff setting at major ports is governed by TAMP with limited pricing flexibility, no such restrictions are placed on non-major ports, which operate on market principles. This has allowed non-major ports to gain market share despite higher tariffs in some cases due to better efficiency and infrastructure, which has resulted in lower overall logistics costs for the end users.

However, in recent years with improvement in infrastructure at major ports and better efficiency, there has been some moderation in shift of volumes from major to non-major ports.

The way forward

Indian port charges are higher as compared to those at some of the competing ports nearby. However, the ability to rationalise port charges is limited by regulatory constraints as well as infrastructure limitations. Easing of the regulatory environment to more market-based tariffs can address some of the concerns. However, the impact will be limited if infrastructure limitations are not addressed. Notwithstanding the above challenges, the fact that port charges account for only a small share of the overall logistics cost for trade should not be ignored, even while efforts should be made to optimise costs.

Based on a presentation by K. Ravichandran, Senior Vice President and Group Head, Corporate Ratings, ICRA Limited, at a recent India Infrastructure conference