The promise with which the National Maritime Development Programnme commenced has started to wear a bit thin. When the Rs 55,803-crore programme was first announced by the United Progressive Alliance (UPA) government in 2005, it expected no less than Rs 34,505 crore of this to come from private investment. In the event, in the UPA government’s first term, major ports got less than Rs 3,500 crore of private investment. Even of this, a mere 10 per cent of the anticipated, a good deal came from projects already committed in the past.
The new government came in with a determination to reverse the trend and three projects were allotted to private players in the first 100 days. Unfortunately, that momentum has not been sustained. In fact, the news has got progressively worse. With a draft sufficient to accommodate next-generation vessels, the Ennore port is a natural for container-handling. Yet, out of six bidders short-listed for a prestigious Rs 1,407-crore container terminal project, the port received just one bid. Mangalore port fared even worse. Not a single bid was received for its Rs 400-crore container terminal.
Until July 2009, nearly Rs 11,000 crore of private investment had flowed into major ports. Container terminals in the Jawaharlal Nehru Port Trust, Mumbai, Cochin, Chennai, Tuticorin and Vishakapatnam were established by private firms. If in spite of improvement in growth numbers after the recent slowdown investment in major ports has not picked up, the impediments to private investment must be identified.
Prominent among these is the upfront fixation of tariff. In the earlier system, after the project was completed, the Tariff Authority for Major Ports fixed tariffs on a cost-plus basis, allowing a return of 16 per cent on capital employed. In the new dispensation, a tariff is fixed upfront even before the project is bid for the full period of the concession (usually 30 years). Although adjustment for inflation is allowed each year, the operator effectively gets the same tariff for 30 years or more.
The logic of the new system is not easy to fathom. To begin with, if you fix tariff on a cost-plus basis, you must know what costs are. How is this possible before they have been incurred? Government gets around this by mandating normative costs. It fixes what it thinks should be the norm for capital and operating expenditure and then allows a 16 per cent return on it. Note that the return is the same but is given on what government in its wisdom thinks expenditure will be, not on what it actually is. All that an unscrupulous operator must do is to cut corners by reducing capital expenditure and his return automatically increases.
The worse part is that the tariff remains constant for the life of the concession. Even if a percentage is factored in for inflation, it is unwise to assume that nothing else will change in the 30 years or so of the concession. Investors are wary because they feel that there could be compelling reasons to increase tariff some time in the 30-year period. But there could also be reasons to reduce tariff. How is either possible when we are committed to one formula for the life of the project?
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The main argument against the new formula is that it addresses no felt lacuna. The old pattern ensured significant private investment in ports. Tinkering with that formula by trying to fine-tune what was already performing well was entirely unnecessary. Policy-makers should have heeded the old American saying: If it ain’t broke, don’t fix it.
And that brings us to the crux of the matter. To sustain increased growth in the economy, few things are as crucial as improved infrastructure in ports, especially those handling containers. Estimates vary, but there is broad agreement that by 2014, the country will have to handle about 21 million TEUs (twenty-foot equivalent units) up from the figure of approximately seven million last year. The shipping ministry estimates that major and non-major ports together must have the capacity to handle 1.5 billion tonnes of traffic by the end of the 11th Plan period. This will require capacity addition of about 800 million tonnes. Clearly, without policies that encourage private investment, none of this will be achieved.
Other than giving the operator a fixed tariff for the life of the project, upfront tariffs were meant to benefit Indian importers and exporters by reducing operational costs. We have seen that they actually inhibit private investment in the sector. What is ironic is that they will give no relief to users of Indian ports. When tariffs in container terminals are reduced, the only beneficiaries are shipping lines that pay cargo-related charges to ports. The tariffs charged by lines to shippers are a function of market forces and have nothing to do with what they pay to ports. Thus, if there is any reduction in cargo handling charges, the chances that these will be passed on to users are remote.
And which are the shipping lines that will benefit? More than 90 per cent of Indian container cargo is carried by foreign vessels. So, policies framed ostensibly to benefit Indian port users will not only inhibit the development of the port sector and threaten economic growth, but will benefit foreign lines rather than Indian users. Policy-makers wanting to rein in costs would be better advised to encourage greater competition through a facilitative environment for private investment.
The author is former secretary, shipping, Government of India