Growing Investor Interest: Funding mechanisms aim to attract greater private participation

Funding mechanisms aim to attract greater private participation

Financing is one of the key aspects determining the success of any infrastructure project, and port projects are no exception. Both public and private sector investments play a significant role in funding port projects. In fact, over the past few years, private sector investment has accounted for more than 80 per cent of the total investment in the sector. Apart from complementing public investment, private players have brought in high standards of efficiency and improved service quality.

A review of the financing landscape and private sector participation in the maritime sector…

Key sources of financing and recent developments

In the Union Budget 2021-22, the Ministry of Ports, Shipping and Waterways (MoPSW) received an allocation of Rs 17.02 billion (budget estimate). This is lower than the budget estimate of Rs 18 billion and higher than the revised estimate of Rs 14.34 billion for 2020-21. Of the total allocation in 2021-22, Rs 4.01 billion has been allocated for the Sagarmala programme, Rs 6.24 billion for inland water transport and Rs 1.35 billion for the development of ports, among other allotments. The shipping and shipbuilding segments have received a total allocation of Rs 1.01 billion. The budget has also proposed a subsidy support of Rs 16.24 billion in global tenders floated by ministries over five years for Indian shipping companies.

External commercial borrowings (ECBs) have been a key source of financing for both major and non-major ports. Major ports such as V.O. Chidambaranar, the Jawaharlal Nehru Port Trust and Kamarajar, as well as the non-major ports owned and operated by the Adani Group, have all raised ECBs to meet their financing requirements. The annual trend in ECB financing has been mixed since 2015-16. The lowest number was reported in 2018-19, when ECBs worth $284 million were raised in the port sector. However, ECBs worth $1,569.31 million were raised in the sector during 2019-20. Another important source of port financing is the banking sector. Bank credits largely meet the financing needs of non-major ports and all privately run terminals at major ports. Till recently, banks such as the State Bank of India, HDFC Bank and ICICI Bank were key infrastructure financiers. However, amidst the economic downturn, many banks have been shying away from lending to the infrastructure sector.

Private sector participation

Public-private partnership (PPP) in the Indian port sector is imperative to not only improve efficiency levels but also to supplement public investments. The build-operate-transfer model has been widely attempted for PPP projects in the sector. Upcoming greenfield ports are primarily being developed on a build-own-operate-transfer or a build-own-operate-share-transfer basis, and project execution is being carried out by setting up special purpose vehicles. The concession period for port projects is usually 30 years. However, 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 structures. In the Union Budget 2021-22, special focus has been laid on increasing PPPs in the sector. The government aims to move towards port privatisation, with plans under way for developing seven port projects, worth more than Rs 20 billion, on a PPP basis.

In February 2020, the PPP wing of the MoPSW issued a public circular inviting suggestions for revisions/amendments in the model concession agreement (MCA), with the aim of aligning the provisions of the existing MCA with best practices to attract more PPP investors in the sector. As of June 2020, more than 500 projects, worth more than Rs 3.5 trillion, are at different stages of development, implementation and completion under the Sagarmala programme. Of these, more than 151 projects stand completed (Rs 806.8 billion). The remaining projects are to be completed in stages, by 2035.

Issues and challenges

One of the biggest problems faced in implementing PPP projects in the maritime sector is  poorly drafted contracts. Contracts lack clearly defined risks and responsibilities for the two parties involved, which creates room for ambiguity and disputes. The lack of a proper dispute redressal mechanism reduces investor interest in projects, thereby weakening overall sector growth. Another challenge is the delay in the grant of clearances. Due to multiple approvals and the inordinate delays in securing them, there is an average lag of two years between the date of award of a project and the commencement of construction work. This leads to the cancellation of projects, with developers and investors backing out.

The road ahead

There is wide scope for private participation in the Indian port sector. A strong project pipeline and the multiple initiatives taken by the government have paved the way for private participation in the sector. Going forward, there is a need to develop well-designed contracts with clearly defined risks and responsibilities for all parties involved in a project. Further, incorporating a mechanism to ensure timely environmental clearances for each project well before the commencement of the tendering process will go a long way in attracting investor interest.