Sunil Jain: Regulators and other disasters

RATIONAL EXPECTATIONS

Last week, this column spoke of the problems with the regulatory guidelines in the case of the ports sector, with some examples (NSICT, CCTL) of how these regulations and/or the shipping ministry helped increase returns for private terminal operators. The problem, however, doesn't stop just there, and poor/inconsistent regulators only worsen the problem.

We spoke last week about the guidelines that allowed operators to declare the royalty they pay the port as an expense and charge customers for it""this is the guideline that got the Tariff Authority for Major Ports (TAMP), under then chairman S Sathyam, to say that theoretically speaking, firms could win bids by quoting a 99.9 per cent revenue share since they could always expense it! Since terminal operators were expensing all their royalty payments and this was raising user-charges dramatically (Chennai Container Terminal Limited, CCTL, wanted a 50 per cent hike in tariffs after promising a 37.1 per cent revenue-share royalty to the port), the revised guidelines said the tariff would be fixed by TAMP in a manner to ensure that the operator didn't make a loss due to the royalty payments but the maximum royalty that could be expensed in such a case would be that paid by the second-highest bidder. So, if firm 'A' won the bid by offering to pay 52 per cent of revenue as royalty and firm 'B' bid 42 per cent, the maximum royalty that could be allowed as expense would be 42 per cent""this is pretty bad in itself, but one could argue it was a start.

Liberal as it was, even this guideline was ignored by TAMP in several cases. While the rule very clearly said the second-highest bidder's royalty bid was to be the maximum that could be allowed as expense, and that such expensing was to be done only if the terminal operator made a loss due to the royalty payments, in August 2005, TAMP decided to allow the Nhava-Sheva International Container Terminal (NSICT) to expense all its royalty payments""the second bidder's royalty bid was around 69.5 per cent that of the NSICT, and in any case, the calculations showed the NSICT was not going to make a loss even if the royalty payments were not expensed. Even in 2007-08, the year in which the NSICT's projected surplus is the least, the projected revenue is Rs 380 crore while the projected operating costs are Rs 139 crore (without allowing royalty payments)""if you now give the NSICT Rs 70 crore of guaranteed payments on its equity and debt obligations, there's still a surplus of Rs 170 crore, which is enough to meet the royalty payment of Rs 137 crore in that year. Indeed, when TAMP was citing the expensing guideline (2.8.1) in its order, it even missed out (deliberately or otherwise) the part which said the expensing would be allowed only if losses were being made.

Since this ruling was obviously flawed, the ministry of shipping wrote a letter to TAMP asking for a clarification on how such full royalty had been allowed as a pass-through (the ministry, interestingly, didn't invoke the loss-making proviso!). Indeed, another terminal operator argued that if the NSICT was allowed to expense royalty payments, why couldn't he, the ministry's letter said. TAMP then decided to allow only the second-highest bidder's bid as the pass-through. This then resulted in the NSICT's tariffs being cut by 12 per cent, but still violated the expensing guideline since the NSICT was making a profit and so was not eligible for such expensing.

In the case of PSA Sical, which runs the container terminal at the Tuticorin Port, however, the ministry decided to take things in its own hand instead of leaving them to just TAMP's mercy, and the result was the exact opposite""royalties were not allowed as an expense.

One of the reasons for the ministry taking a tough stance was also that PSA Sical was operating on an interim tariff since 1999 and when TAMP said, in 2002, it needed to cut tariffs by 15 per cent, PSA Sical went to court and got a stay and later got the order reversed""this non-implementation of the 2002 TAMP order resulted in it gaining an additional Rs 73 crore. Under a compromise reached after TAMP decided to appeal the high court's order, PSA Sical was to approach the ministry to decide on whether royalty payments should be expensed (the 2002 TAMP order had refused to allow this for PSA Sical, just as it had done in the case of CCTL). The ministry issued a direction which read: "After considering the proposal of PSA SICAL ... it clearly emerges that the pre-condition of incurring loss for claiming at least part of royalty as pass through has not been satisfied in this case ... Therefore, it emerges that the request made by PSA SICAL for allowing royalty as pass through for the period up to 31st March, 2005 is devoid of merit and cannot be accepted. TAMP is directed under Section 111 of MPT Act, 1963 to consider the tariff fixation case of PSA SICAL accordingly. The TAMP will be guided by the provisions of the revised tariff guidelines in the matter."

With this directive, TAMP then slashed PSA Sical's tariffs by 50 per cent, pointing out that while the firm had claimed it was going to make losses of Rs 8 crore between 2002 and 2006, TAMP's calculations showed it was making a profit of Rs 66 crore! PSA Sical has gone to court again.

If there can be such huge differences in what the companies claim and what the regulator finds, and regulatory rulings differ so wildly, from each other and from the rules (which are themselves excessively liberal as last week's column showed), users of Indian ports have every reason to be worried.