The Hindu Business Line : Royalty/revenue share as a cost item — Private operators seek redress from Ministry

A Shipping Ministry guideline says that the policy of not allowing royalty/revenue share as a pass-through item in calculating tariffs would take effect `prospectively' and not `retrospectively'. But the ambiguity in interpreting those terms is affecting the returns of some operators.

THE issue of treating royalty/revenue share paid by private operators to port trusts as a cost item or not while fixing/revising tariffs at their terminals has once again come to the fore with the Tariff Authority for Major Ports (TAMP) rejecting a demand from South West Port Limited (SWPL), formerly ABG Goa Port Private Limited, in this regard saying it was not in consonance with the July 29, 2003 Shipping Ministry order.

The Ministry had, in its July 2003 guideline, stated that the policy of not allowing royalty/revenue share as a pass-through item in calculating tariffs would take effect prospectively and not retrospectively. But the private operators say there is a perceptible lack of clarity in the words "retrospectively" and "prospectively".

Does this include private operators, such as Visakha Container Terminal Private Limited (VCTPL) and SWPL, which commenced operations after the guideline was issued though they were awarded the contract much earlier or does it cover only those projects that were tendered, finalised and awarded after the July 2003 order, such as the third terminal at JNPT and the international container transhipment terminal (ICTT) at Vallarpadam in Kochi port?

VCTPL and SWPL are of the view that they should not be covered by the July 2003 order, saying that the tender conditions for their projects did not mention anything about royalty/revenue share payment not being considered as an admissible item of cost for tariff fixation, whereas this clause is clearly mentioned in the tender terms for the third terminal at JNPT and the ICTT at Cochin.

The P&O Ports-run Chennai Container Terminal Limited (CCTL), which began operations in November 2001 and falls under the first category, still had to seek an exemption from the Ministry and was allowed to treat a good part of its revenue share paid to the Chennai Port Trust as a cost item for tariff fixation after it submitted that the terminal was incurring losses mainly due to the decision to disallow revenue share as a cost element.

Following this, PSA SICAL Terminals Ltd, which has been operating a container terminal at the Tuticorin port since late 1999 and is in the same category as CCTL, sought a similar exemption from the Ministry's guidelines; the demand is set to be accepted. SWPL, which was awarded the contract on April 11, 1999 to develop and operate two dedicated multi-purpose cargo berths at Mormugao Port, has also approached the Ministry for relief on this account.

Simultaneously, it has requested TAMP to consider the royalty/revenue share payable to Mormugao Port Trust at 18 per cent on the income estimated from cargo handling charges as an item of cost for tariff fixation on the ground that commitment about royalty payment to the port trust was made much before the government took a policy decision of not considering royalty/revenue share as item of cost for tariff fixation.

"Besides, any policy which came into effect seven years after we had submitted the bid and four years after an agreement with the Mormugao Port Trust should not be applied retrospectively.

If this request is not accepted by the Authority, our return may get depleted by almost 6 per cent and the project would become unviable," SWPL had submitted in support of its claim. According to SWPL, the grounds on which the Ministry had issued a direction in the case of CCTL, directing TAMP to consider part of the royalty payment as cost for tariff fixation should be applicable in its case also.

But the tariff regulator pointed out that the policy of not considering royalty/revenue share as item of cost was made known through various orders passed by the Authority in the case of tariff fixation of private terminal operators such as CCTL, PSA SICAL and VCTPL. The Ministry of Shipping also issued orders on July 29, 2003 endorsing its stand that royalty/revenue share would not be treated as item of cost.

"The subsequent policy direction issued by the Government to consider part of revenue share for tariff fixation is restricted only to the CCTL and hence, it is not open for this Authority to extend the Government directive to all private terminal operators in the name of precedence.

VCTPL, run by United Liner Agencies-Dubai Ports International combine, says that it will also "qualify" for an exemption from the Ministry ruling though TAMP has rejected its claim on this issue while approving an interim tariff which is 10 per cent lower than the rates prevailing at the nearby CCTL. The ULA-DPI team started operations on June 26, 2003.

"TAMP has cleared a tariff for our terminal not in terms of cost, but in terms of market. This tariff has nothing to do with cost and whether royalty/revenue share is admitted as a cost item or not. But, the moment TAMP gives us a sensible tariff, then only I'll insist that royalty/revenue share has to be a part of our cost. Hence, our claim that royalty/revenue share paid by us to Visakhapatnam Port Trust will be a part of cost remains and VCTPL will also qualify," a top ULA official told Business Line.

Private operators have consistently argued that, globally, royalty/revenue share is admitted as a cost item for fixing tariffs at ports and the flow of private investments would be affected if this were not allowed in India.