India's reworked port tariff rule fails to ease investor worries

India's reworked port tariff rule fails to ease investor worries

Cargo volume at DP World's Nhava Sheva International Container Terminal (NSICT) has declined from 1.51 million TEU in fiscal year 2010-2011 to 641,122 TEU in 2017-2018, according to JOC.com data. Photo credit: Shutterstock.com.

Lawmakers in India have drawn up a new port tariff policy in an effort to address competition concerns for older terminal concessionaires unfairly disadvantaged by a 2005 revenue sharing program, but those early investors say the new policy doesn’t go far enough in leveling the playing field with newer entrants.

The “Tariff Guidelines 2019,” finalized last month after a protracted debate among various supply chain stakeholders, are intended to neutralize the adverse impacts of a cost-plus pricing regime on 15 build-operate-transfer (BOT) operators that signed concessions during the budding stages of port privatization in the country between 1997 and 2007. The group is led by Nhava Sheva International Container Terminal (NSICT) at Jawaharlal Nehru Port Trust (JNPT), having started operations in 1997 under a 30-year operating concession with London-based P&O Ports, which was acquired by DP World in 2006.

Concerns about the flawed 2005 tariff regime are two-pronged and include additional revenue accruing from any throughput beyond the contracted minimum performance commitment and royalty fees to the landlord port or the government. Under the cost-plus methodology, revenue generated from surplus cargo volume is factored in when the regulator Tariff Authority for Major Ports (TAMP) fixes tariffs every three years. This has become a painful thorn in the side of these initial investors, as some have been forced to drastically reduce rates and, as a result, have had to scale back available capacity.

‘Regressive’ and ‘discriminatory’

Since 2005, the tariff guidelines have been modified three times — in 2008, 2013, and 2015 — for successive bidders, further complicating matters for those that entered the market prior to their enactment.

However, even the proposed, alternative model does not address the two most contentious issues because the government concluded that allowing royalty and revenue share parameters as a “pass-through or an expense” would excessively hurt users, as the scale of rates would have to be adjusted upward to reflect "the cost plus a necessary return on investment." Complicating matters further, the tariff regime has resulted in several court battles between aggrieved operators, individually and collectively through the Indian Private Ports & Terminals Association (IPPTA), and TAMP.

IPPTA, in its submissions filed with the Ministry of Shipping on the draft tariff 2019 document, argued that new regulations are riddled with inconsistencies and urged the government to consider formulating a broader policy under which prices are determined by market demand.

“The guidelines seem, in some areas, to retain certain regressive portions and adopt new ones which seem to be discriminatory when compared to the guidelines of 2008, 2013, and 2015,” the association said. “While the aim of these guidelines are to rectify some of the past issues arising [from] the 2005 guidelines, we find that there are still major gaps with respect to the certain contract changes in the treatment of royalty and computation of surplus.”

IPPTA added that the existing tariff structure prevents these operators from maximizing productivity and, therefore, return on their investments, as “any increase in additional throughput adds to their costs,” often to the point where operations become commercially unviable. The net result, according to the group, is underinvestment in infrastructure and service upgrades and under-utilization of capacity.

“It is necessary to allow the royalty/revenue share paid to the landlord as a 100 percent pass-through, as a cost, for tariff determination. It is to be noted that the BOT operator must ultimately charge what the market force will afford to pay for the services that it receives,” IPPTA said in its filing.

In addition, the private terminal body sought a 15 percent “performance-linked” rate hike option, subject to predetermined benchmarks, as permissible under the 2013 tariff policy. However, this has also not been considered by the government, as it believes any such an incentive will have run counter to obligations already in place under individual concession contracts.

“It may be noted that most of the terminals [were] built in the late 1990s or early 2000s,” it said. “Therefore, the standards, the operators would suggest, would be based on their current performance. However, should an operator choose to adopt the 2013 guidelines performance standards, then they should be suitably compensated for the efficiency and value.”

One key highlight of new rules is that terminal operators migrating from the 2005 pricing system to the revised 2019 program will be allowed a 16 percent return on “gross fixed assets” employed, similar to how price is determined for concessionaires governed by the 2013 rules. This contrasts with the 2015 tariff program, which instead offers a 16 percent return on “net investment,” meaning the current cost of capital employed. The gross valuation criterion is being adopted because benchmarking older operators against newer ones could prove to be problematic or implausible, given the equipment quality differences. However, as concerns persist, it remains to be seen how many of the older operators will eventually switch to the revised tariff framework.

Officials at IPPTA declined to comment further when contacted by JOC.com. The final regulations, along with a supplementary agreement, are currently in the last stages of vetting by the relevant officials.

Shifting volumes

Besides NSICT, the cohort of older concessionaires includes APM Terminals’ Gateway Terminals India (GTI) at JNPT, DP World’s terminals at Chennai and Cochin, and PSA International’s terminals at Chennai and Tuticorin. With multiple port locations, DP World is seen as the biggest victim of the lopsided pricing regulations.

GTI, NSICT, and PSA Tuticorin also bore the brunt of TAMP’s downward tariff revisions, reducing port fees 44 percent, 28 percent, and 34 percent, respectively, although they later won a temporary reprieve through court intervention. Further, NSICT and PSA Tuticorin, which were trailblazers in India’s port privatization efforts — with operations getting off the ground in 1997 and 1998 — have seen royalty payment obligations increase dramatically. According to information obtained by JOC.com, these grew from 47 rupees per TEU to 5,610 rupees per TEU for NSICT, and from 102 rupees per TEU to 5,178 rupees per TEU for PSA Tuticorin.

These factors have pushed DP World Nhava Sheva (JNPT) to prioritize operations at its newer Nhava Sheva (India) Gateway Terminal (NSIGT) and to pull container handling at NSICT back to its contractual minimum level of 600,000 TEU annually. NSICT’s volumes have steadily declined, from 1.51 million TEU in fiscal year 2010-2011 to 641,122 TEU in 2017-2018, whereas throughput at NSIGT has increased from 445,111 TEU in 2016-2017 to 659,400 TEU in 2017-2018, according to JOC.com data.

The fate of PSA Tuticorin — once considered a productivity leader in the region — looks even more dire owing to tariff hurdles and heightened competition. The terminal handled just 5,741 TEU in January, compared with a monthly average of about 37,000 TEU in 2018. At the same time, the competing Dakshin Bharat Gateway Terminal (DBGT) has been gaining market share at a healthy pace, with volume rising from 36,002 TEU in December to 57,405 TEU in January, statistics show. Several mainline carriers that had previously used the PSA terminal recently shifted calls to DBGT to take advantage of higher productivity rates. PSA is obligated to handle 300,000 TEU annually and must pay container royalties, which rise roughly 20 percent every year, on this figure regardless of the loss in traffic.

DP World Subcontinent, APM Terminals Mumbai, and PSA India did not respond to JOC.com’s repeated requests for comment.

India’s port-related tariff regulations will remain a major source of concern for both domestic and foreign investors eyeing growth opportunities in the emerging market economy. Besides BOT terminals, TAMP also has regulatory jurisdiction over inland logistics projects developed by major public ports through private participation. In the absence of a demand-based, independent pricing market, investors will be wary of investing in a large dry port for hinterland cargo aggregation and distribution that JNPT intends to open at Wardha, about 500 miles away from the harbor. The 350-acre project, with a phased development program, was announced in 2017, but given the lukewarm reception from investors, JNPT has requested the government provide an alternative pricing model without TAMP controls.

On the flipside, some of the smaller private ports — in particular those operated by Adani Group — armed with the freedom to adjust pricing dependent on demand, have made deep inroads into the Indian export-import freight market.

With its large population and burgeoning middle class, India has the potential to grow at a faster pace, but rapid GDP and trade expansion is hamstrung by its inadequate and outdated transportation infrastructure, archaic procedures, and bureaucratic barriers. However, a recent spate of economic reforms, combined with a renewed push for investment in infrastructure and digitization, are signs the government is taking these concerns seriously.