Older Indian marine terminals wary of new pricing model

Older Indian marine terminals wary of new pricing model

India’s Tariff Authority for Major Ports in April issued final 2019 tariff guidelines, along with provisional operating rules for 15 build-operate-transfer operators that had secured development contracts at major public ports between 1997 and 2007. Photo credit: DP World Subcontinent.

India’s older private terminal concessionaires — hopeful of a fair exit from a flawed 2005 tariff policy — are becoming skeptical about how past revenue accumulations will be treated under the alternative pricing model currently in the final stages of implementation.

Following protracted stakeholder consultations, India’s Tariff Authority for Major Ports (TAMP), the country’s port regulator, in April issued final 2019 tariff guidelines, along with provisional operating rules for 15 build-operate-transfer (BOT) operators that had secured development contracts at major public ports between 1997 and 2007.

Under the reworked regulations, the government has provided for a 16 percent return on “gross fixed assets” employed — akin to how price is determined for concession holders governed by the 2013 guidelines, but said as some terminals were mired in litigation, their scale of rates would be reviewed dependent on the outcome of such legal actions.

In its latest intervention with the TAMP last week, the Indian Private Ports & Terminals Association (IPPTA), the representative body of private investors, said there is little clarity at this point about exactly how surpluses or deficits built up during the litigation period will be handled.

That outreach effort is seen as a “reactive” approach to a reported government action appointing a task force — consisting of IPA, TAMP, and port officials — to study the transition issues and provide recommendations for a broader policy environment.

Group cites government inaction

The IPPTA argued the complicated cost-plus tariff system, promulgated in 2005, was to have been modified after five years, but it took as long as nine years to be updated or replaced. The terminal association said the delays caused by government inaction deserve to be given due consideration, stressing that the calculations surrounding a 16 percent return on gross capital employed be applied retroactive to 2010.

“It is suggested that out of any surplus generated over and above the allowed return as calculated per the 2019 guideline formula, 60 percent may be retained by the PPP [public-private partnership] operator and 40 percent adjusted against future ARRs [average rate of return],” the IPPTA said in its letter.  “It may also be noted that a similar manner of calculation of allowable return has been formulated in the 2008 guidelines and continued in the 2013 guidelines.”

The association requested TAMP put forward its suggestion to the joint committee while filing a report with the government.

Under the 2005 tariff program, investors have lacked the ground to maximize terminal capacity through efficiency efforts as additional revenue earned from any volume handled beyond the contracted minimum performance commitment is typically factored in when the TAMP sets tariffs every three years. This skewed method has cost some operators dearly, with terminals operated by DP World and APM Terminals at Jawaharlal Nehru Port Trust (JNPT), India’s busiest container harbor, as well as PSA International’s first Indian investment at the Tuticorin port (South India), suffering substantial rate reductions at the hands of the regulator, although they later won a temporary reprieve through court intervention.

Since 2005, India’s port tariff guidelines for BOT contracts have been revised three times — in 2008, 2013, and 2015 — for successive bidders, thus rendering the older cohort even more uncompetitive.

Some industry leaders see the alternative model as a positive development, but the IPPTA earlier called it “regressive [and] discriminatory,” as the government opted to maintain the “status quo” on revenue share and royalties — the beleaguered group’s chief concern.

“By disallowing the royalty/revenue share paid to the landlord port either entirely or partially and absorbing it as a cost by the BOT operator, limits the surplus. Therefore, to unleash additional capacity and augment the infrastructure facilities in the port, it is necessary to allow the royalty/revenue share paid to landlord port as a 100 percent pass through as a cost for tariff determination,” the IPPTA previously said. “Operators should be allowed to maximize throughput, increase efficiency, and optimize utilization of resources/infrastructure.”

As the government and other stakeholders struggle to fix pricing and other infrastructure issues plaguing terminals at major ports, privately operated minor ports are making rapid inroads into the emerging container market by aggressively using the advantages of unregulated, flexible tariffs and productivity edges. The Adani Group, which currently has operations at 10 port locations and is prowling for more strategic acquisitions — with the Krishnapatnam Port reportedly being the latest target — commanded approximately 30 percent of containerized shipments in and out of the country last year.

Bency Mathew can be contacted at bencyvmathew@gmail.com.