<b>Michael Pinto:</b> No one's setting anchor here

Thanks to a curious procedure for allotting projects under the PPP regime, few want to develop ports in the country.

Programmes for implementation in the first 100 days have lost a bit of their sheen recently but the shipping ministry’s announcement that three Public Private Partnership (PPP) projects will be operationalised in this period still merits at least two cheers. Only two, since the port sector was one of the few infrastructure areas into which private capital flowed quite freely in the past, one might have legitimately expected that the ministry would have more to boast of than just these three projects. Unfortunately, the recent past has seen a worrying fall in private investment in major ports with the last five years bringing in barely Rs 3,142 crores of private investment. The major chunk of even this relatively small sum actually relates to projects negotiated earlier. Critics have identified the new rules governing such investment as one of the inhibiting factors in this precipitous decline.

Some four years ago the ministry and the Planning Commission decided that the procedures for allotting projects under the PPP regime would be modified. A Model Concession Agreement (MCA) was framed and was made compulsory for every new PPP project. Before the project itself could be approved, it had to be cleared by a PPP Appraisal Committee (PPPAC) chaired by the secretary in the finance ministry. Finally, it was decided that before any project was put up for bidding, the tariff to be charged by the successful bidder would be determined up-front instead of being decided later by the Tariff Authority for Major Ports (TAMP).

In the pre-MCA days, ports drafting agreements for signing with successful PPP bidders would scrupulously follow a check-list prepared by the ministry. Provided all the ingredients of the check-list were followed, the port had the flexibility to draw up its own document. This allowed an individual port to use the agreement to leverage its strengths and compensate for its weaknesses while ensuring conformity with fixed parameters laid down by the ministry. It also ensured that projects for establishing container terminals for example, were treated differently from terminals for handling bulk which in turn were differentiated from those handling liquid cargo.

The effect of the new dispensation was to put all projects, whether for containers, bulk or liquid or even for installing new equipment, into the straitjacket of a single agreement. This obviously made the agreement extremely bulky because one document now had to cater to all the variations inherent in such different activities. What needs to be covered in an agreement to establish a container terminal, for example, is vastly different from what must be covered in a bulk terminal or a liquid terminal. The concerns to be addressed in a multi-purpose berth are again not the same as those in uni-product or even captive berths. In fact, the first time the agreement was sought to be used in the Ennore port, the matter went to the High Court and prevented the early allotment of the project. Critics of the MCA point out that its main defect is that it is superfluous: One does not need an MCA to ensure a successful PPP. Not only is the MCA required to cover the diverse requirements of different kinds of projects, it does not even allow a port to leverage its peculiar advantages and use them to compensate for any weaknesses it may have.

Equally baffling is the insistence that each project must go before the PPPAC for approval. In all PPP projects so far executed in major ports, the entire investment has come from the private party. The port only offers the use of the waterfront to the successful bidder. Projects are allotted to the one offering the highest share of the revenue stream to the port. The need for private investment in the port and in the relevant area (whether container, bulk, liquid or multi-purpose) is determined by the ministry which is supposed to be the expert on the question. In such circumstances, what value can the PPPAC add? If the project is to be executed with government funds or even with resources of a PSU, there could possibly be some justification for an inter-ministerial group to sit in judgment on the merits of the investment to be made. But in the case of PPP projects, wholly funded by private investors, why is the government bothered about the return on investment and what role is there for a body outside the parent ministry?

The most amazing innovation, however, is the up-front fixation of the tariff that the private operator can charge. Normally TAMP would fix tariffs after the project is completed by allowing a reasonable return on the capital employed. If the fear is that TAMP allows higher tariffs to be fixed or that operators can get away with goldplating their projects, it is unclear how these can be addressed by fixing the tariff in advance. Surely our ability to fix accurate tariffs cannot decline as the project progresses?

Actually the matter is more complicated. Since TAMP-denominated tariffs are fixed on a cost-plus basis, how do you fix tariffs when costs are yet to be incurred? Even if the operator indicates the total project cost, what guarantee is there that the final project executed will adhere faithfully to the blueprint? In the unlikely event that a vigilant port can establish that it does not, will the entire contract be cancelled on these grounds? Upfront fixation of tariff offers no solution to the ills of goldplating but may well allow a less than scrupulous operator to skimp on the equipment he was supposed to install.

The new ministry has already signed one agreement in the first 100 days and two others are expected to follow suit shortly. But if the trickle is to turn into a flood, some re-thinking on the procedures being followed will be needed.

The author is a former secretary of the shipping ministry