Former Finance Minister and newly-appointed President of India, Pranab Mukherjee, underlined the importance of port development in the country in his last Budget by provisioning the issuance of tax-free bonds up to Rs 5,000 crore and announcing reduction of withholding tax on external commercial borrowings.
In the next five years, India expects investments to the tune of Rs 1.5 lakh crore in the port sector. Most of this investment will be under the public-private-partnership (PPP) model, mainly foreign capital. In order to attract this size of investment from abroad, the Government needs to show political will and astute decision-making,.
At $4.4 trillion, India is the world’s third-largest economy on the basis of purchasing power parity. However, we are ranked thirteenth globally in imports and twenty-first in exports (2011); ninety five per cent of this foreign trade volume is by sea route. India’s total container throughput (number of containers passing the port terminals) was 9.7 million TEUs in 2011, which is less than the container volume of only seven Chinese ports. This, when India has 13 major ports (controlled by the central Government) and 180 minor/intermediate ports (controlled by respective states).
Big growth ahead
India’s export-import (Exim) trade is projected at $800 billion by 2014 and $1800 billion by 2020. Port throughput, which was 940 million tonnes in March 2012, will grow at an estimated 266 per cent to 2,500 million tonnes in 2020. Port capacity of 1,020 million tonnes is estimated to grow by 315 per cent to 3,200 million tonnes during the same time. Such huge expansion requires an estimated $20 billion in port infrastructure investment to meet the projected growth.
As most of this will be under PPP, that too foreign capital; global competitiveness will be the deciding factor. If Indian port sector has to emerge as a key facilitator and accelerator towards economic development, it needs to be competitive in the global market place. Only competitiveness would ensure infusion of both local and foreign capital, technology upgradation and, above all, the best talent for the development of the sector and consequently for the economy as a whole.
Now, what are the impediments in ensuring this competitiveness? There are three categories of port related competition; inter-port, intra-port and intra-terminal competition. Inter-port competition exists when two ports, either in same country or in different countries, are competing for the same cargo; the scale of competition often depends on the size of the hinterland of the concerned ports. Intra-port competition is where two or more terminal operators within the same port area compete for the same type of cargoes. Intra-terminal competition refers to two or more companies competing within the same terminal, a situation which is rare and usually only exists within small ports operating under the service port model.
In the case of Indian ports, it is largely inter-port and intra-port competition that prevails; both of which are in growth phase. While inter-port competition is hindered by insufficient hinterland connectivity and also because not all ports can offer similar facilities, intra-port competition is hampered by different tariff models for terminals in same port. Due to Tariff Authority of Major Ports (TAMP) guidelines based on different time period in which the terminal is set up, flawed guidelines and delay in revision of tariffs is a major concern. Further, not even all the major ports in India can provide similar facilities in terms of draught requirement, storage etc.
Hence, shippers often skip certain terminals or ports, which may otherwise be a competitive option. Furthermore, there are rigidities in pricing, as a result of which traffic of nearby ports cannot be enticed through value-added services or tariff reduction. The authority of Director General of Shipping in giving directions regarding route, cargo and others severely limit competition. The hinterland is no longer captive for the major ports due to setting up of inland container depots, national highways development, pipelines and development of other ports under state Governments. Besides, partial privatisation of ports’ infrastructure has given rise to intra-port competition.
The thirteen major ports, spread equally on the east and west coast, handle over 75 per cent of India’s foreign trade. These ports follow a cost-based pricing, where TAMP is responsible for setting the tariff, whereas the non-major or private ports are ruled by market-driven prices. This tariff-fixing methodology has had a negative impact on the profitability and returns of the PPP project developers. No uniform approach is followed in applying tariff regulations to major ports and terminals.
Different guidelines are applied based on the period in which they are set up, that is 2005 Guidelines and 2008 Guidelines. Globally, tariffs are regulated only in business-to-consumer transactions, to protect end-user interest, and not business-to-business as is done in India.
Anomalies in the tariff-setting mechanism, leading to tariff cuts for being efficient, make investments in the container terminal business in India a very high risk sector; severely restricting new players and further capital infusion by existing ones.
The government has been aware of the issues and is working hard to eliminate the anomalies in this very crucial sector. TAMP was set up when there was no or very little competition, hence the need to regulate the sector. Now, with the privatisation initiatives taken by government paying rich dividends, the market force should be able to do the tariff setting. The B.K. Chaturvedi Committee, set up by the Government, is also of the view that the major ports should be given the freedom to set rates based on market prices, with proper checks and balances.
Further, the Land Acquisition Rehabilitation and Resettlement Bill 2011, seeks to remove impediments in the way of land acquisitions. In November 2011, Prime Minister’s Office set up a committee under Cabinet Secretary A.K. Seth to expedite the approvals for twelve port projects over Rs 5,000 crore.
These initiatives will surely address the challenges in the sector. More focus should be given on expanding capacity and improving operational efficiency. Although there have been positive developments as far as promoting competition is concerned, problems in certain areas still exist.
The public sector has maintained dominance in the sector and some rules and regulations are not necessarily promoting competition. Lack of insufficient hinterland connectivity, especially due to inadequate rail and road connectivity at a number of ports, also hinders competition. The regulatory framework, comprising of many regulators and multiple legislations, is also complex and needs simplification to enhance integration and better co-ordination.
Delivery mechanisms are of utmost importance for the Indian economy. Guidelines should promote growth and competition in transparent manner in order to enable foreign capital in this crucial sector; for the overall growth of the economy of our country.
(The author, an IIM-Ahmedabad alumnus, is an independent consultant on urban infrastructure and shipping issues.)