Financial Daily from THE HINDU group of publications
Monday, Aug 25, 2003
Port trusts, pvt terminal operators Uniform approach to ROI mooted
The focus appears to be on introduction of a uniform approach to reward a return on investments for both the port trusts and private terminals to provide a level playing field for both the entities.
As the first step, TAMP has appointed CRISIL Infrastructure Advisory to review the existing mechanism for return on investments at present being allowed to the various players in the ports sector, apart from other related issues. Based on the CRISIL report, TAMP has recently prepared a discussion paper, titled "Study on allowable return on investments in major ports tariffs", which has been distributed among the major ports and private terminal operators.
Later, TAMP plans to call for a meeting with the various players in this sector to get their feedback on issues related to tariff fixation and list out suitable recommendations to change the existing mechanism, especially in the light of the entry of private operators into the major ports, informed sources said.
The terms of reference for the CRISIL study include a review of the way Return on Capital Employed (ROCE) is currently computed while determining tariffs for port trusts and to suggest modifications, if necessary; review of the existing method of computing return on investment while determining tariffs for private terminals; and examination of the suitability and feasibility of extending the method adopted for private terminals to major port trusts also.
CRISIL has also been asked by TAMP to analyse the various components constituting capital employed/investments and to prescribe a normative level for each components for the purpose of their admissibility in tariff fixation and to recommend a reasonable level of return on capital employed/investments for major port trusts and private terminals. TAMP has suggested a method of linking `return' with `utilisation of facilities created'.
TAMP, which is empowered to fix and revise tariffs charged by the major ports and the private terminals in the major ports, at present adopts the cost-plus approach in evaluating port-pricing proposals.
The approach intends to ensure that the "regulated entity" (port trust or private terminal) is compensated for all "justifiable expenses" and earns a "reasonable return" on its investments in the project.
The twin objectives of the regulator are to balance the two factors of providing a stream of income to investors sufficient enough to attract investment into the industry, and ensuring fair deal to the consumers.
Currently, in port trusts, the ROCE allowed is equal to the rate at which the Government lends funds to the port trusts plus a three per cent contribution each to the mandatory reserves maintained by them. Since the Government's lending rate for the last fiscal was 12.5 per cent, a return of 18.5 per cent (12.5 plus 3 plus 3) on capital employed was allowed to the port trusts last year.
In the case of private terminal operators, TAMP has adopted an interim approach to allow return on respective sources of funds instead of considering capital employed as a whole. In this approach, a pre-tax return on equity of 20 per cent is allowed, irrespective of any tax holiday or exemptions enjoyed by the terminal operator.
After examining the various issues involved, CRISIL has noted that "since the business assets and the business risks associated with the assets are similar in nature, it would be unfair to distinguish between a port trust and a private terminal." Especially in the light of the fact that the port trusts are proposed to be corporatised and will have to compete with private terminals and private ports, the risks are expected to be of similar nature. "Hence there is a need for a uniform approach to reward a return on investment for both the port trusts and private terminals," the report has pointed out.
It has been recommended that in order to move towards a uniform approach, the two options of private terminals moving to the port trust system of ROCE, and the port trusts move to the private terminals system of ROI be considered.
After studying both the options, TAMP's discussion paper has recommended that the ROCE approach be adopted for estimation of allowable returns for major ports as well as private terminals.
For, from the perspective of application of the ROCE option to private terminals, a return on the capital employed allows the private terminal to optimise the financing pattern as per the requirements of the investors.
The reasons for recommending the uniform ROCE approach are that it is simpler to define capital employed for an entity, be it a corporate or a trust and that it allows for financial engineering by the firm to optimise its cost of capital in line with the allowable return.
This, the discussion paper points out, would also promote the objective of the regulator to "assess the reasonableness of investments," and financial discipline would be a first step towards eventual corporatisation of the port trusts.
Taking into account factors like risk-free rate, debt-risk premium, pre-tax cost of debt, market risk premium and pre-tax cost of equity, the CRISIL study has recommended a 15 per cent allowable ROCE for port trusts and 16 per cent for private terminal operators.
While it is not known how the port trusts and the private terminal operators would react to this recommendation, the discussion paper has sparked a debate in the ports circle, which is expected to culminate in a meeting between the TAMP and the various players in this sector later.
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