Should TAMP be abolished?

Tariff fixation by the Tariff Authority for Major Ports (TAMP) in the case of private container terminal operators in India has become an issue of intense debate and concern.

The Authority was constituted in 1997 as an independent statutory authority to fix tariffs to be levied and collected by Major Port Trusts as well as private operators in such Port Trusts for various services provided by them.

The role of the Authority is limited to fixation and revision of tariffs.

The private sector participation in Major Ports began in 1996. The policy has been modified from time to time. The Major Port Trusts entered into concession agreements with terminal operators to create efficient capacity for handling growing container traffic in India.

Under the licence agreement, operators are required to levy and collect tariffs as approved and notified by the Authority from time to time.

The recent downward revision of tariffs has evoked sharp reactions from both the terminal operators as well as the port trusts.

Market knows best

The Port Trust is advocating that tariff fixation should be left to the market and not to the Authority. It is also argued that the drastic rate cuts by the Authority have made the terminals unviable.

It is feared that the terminal operators instead of increasing their throughput will reduce it as the present system penalises performance and efficiency.

It is further argued that there is no need to regulate port tariffs, which constitute only 3 per cent of the total logistics cost.

The present regulation does not provide a level playing field as non-major ports are not regulated. Therefore, it may lead to movement of private investment from major ports to non-major ports.

Public-private partnerships

The objective of private sector participation in major ports is to create efficient infrastructure to handle increasing cargo volumes and providing services to customers at competitive prices.

The idea is to enhance capacity, efficiency and competitiveness in providing port services through private participation.

Therefore, a public-private-partnership (PPP) project is not a matter of privity between the private operator and the Government-owned port authorities.

Public interest, an important dimension of any PPP project is critical and needs to be kept in mind during the entire period of operationof the licence agreement.

The port authority as an agent of government has the mandate to uphold this important dimension of a PPP contract.

The role of a regulator such as TAMP, which has power to fix tariffs, is limited. In the absence of a broad-based regulatory mechanism in place, the port authority acts both as a licensor and regulator.

Therefore, the argument to undermine the limited role of the regulator has to be viewed seriously. This is not to say that all is well with the Authority. The tariff guidelines need a breath of fresh air.

Efficiency Argument

The argument that rate cuts penalise efficiency and performance is simplistic. The concession agreements entered into before 2008 are of two types. The projects prior to July 2003 were awarded on per-TEU royalty basis, whereas for projects after that, the bidding parameter has been the percentage of revenue to be shared with the licensor.

While partial royalty was permitted as cost or pass-through for determination of tariffs in respect of pre-July 2003 cases, revenue share was not permitted as a pass-through or a cost for fixing tariffs for post-July 2003 ones.

The operator was selected on the basis of highest royalty represented by its net present value on the minimum guaranteed throughput (MGT).

In the second type of cases, the selection parameter was the highest percentage of revenue share assuming MGT. It was left to the operators to invest and achieve more than the MGT and earn more profit.

It is also pertinent that the Authority followed a cost-plus approach in tariff fixation, where the part of royalty and revenue share was not considered as a cost. In both these cases, the operators were saddled with tariff risk when the tenure of the agreement was fixed and traffic was not a problem. The tariff was left to be decided by the Authority by following its guidelines which were modified periodically.

This created a situation where the surplus earned by the operator over and above the permitted return was required to be adjusted by the Authority while fixing tariffs for the next tariff cycle; hence, the tariff reduction.

This situation has primarily arisen due to the fact that the operators achieved throughput which was far in excess of what was projected by them at the time of submitting their tariff revision proposal.

In all cases while submitting the tariff proposal, the operators have sought increase in tariffs. Therefore, the efficiency argument lacks credibility because efficiency and optimised operations should result in cost savings, both for the operators as well as the end users.

Whether the incremental throughput, that is, the difference between the actual and projected throughput, is exclusively attributable to efficiency factor needs scrutiny.

The terminal operators should not relate efficiency only to increased volumes. An efficient operator would not always propose for increase in tariffs without any drastic improvements in the service standards.

Non-competitive Market

The argument of deregulation of tariffs needs reflection. Is the container market in India mature and competitive?

Major ports handle 84 per cent of the country’s trade. The private terminal operators account for 85 per cent of the Indian market.

If we analyse the private terminals further, we would see that the share of DP World (Jawaharlal Nehru Port Trust, Vallarpadam, Chennai, Mundra and Vizag) is 43 per cent, PSA Terminals (Kandla, Kolkata, Chennai and Tuticorin) is 15 per cent and APM Terminals (Pipavav and Gateway Terminals India) is 27 per cent of the country’s trade.

The dominance of private terminal operators in major ports is evident.

Since, the Authority controls over 84 per cent of the container trade, the argument of absence of a level playing field seems to be overplayed.

In any case, tariff as a single factor influencing movement of investment from major ports to non-major ports is uncertain as other important factors are responsible for investment decisions.

In JNPT, India’s premier Major port that handles 55.62 per cent of total volume of container in major ports, the scenario is no different.

Among three terminals in JNPT, Nhava Sheva International Container Terminal (DP World) and Gateway (APM) account for 76 per cent of traffic.

DP World, PSA and APM are among the top five largest port operators in the world. Strategic alliances between the shipping companies and these world leaders are common commercial practices.

For instance, at JNPT the top 10 shipping alliances control more than 60 per cent of the cargo. Nhava Sheva and Gateway attract a major share of alliance-based services, while the State-owned Jawaharlal Nehru Port Container Terminal caters to smaller shipping lines.

Alliances are entered to obtain scale advantage and extend service coverage where individual capacity is constrained.

They also limit external competition and catalyse to enter into new trade routes. All this has a bearing on the cost of container movement.

The container freight station (CFS) business is also highly influenced by shipping lines as tie-ups and line nominations can directly promote the use of the associated CFSs.

Therefore, the structural framework of the market can hardly be termed as competitive, robust and mature enough for fair determination of tariffs.

In the present scenario, it would be undesirable in the trade interest to leave tariffs to the market.

Too Small a Cost

The demand for deregulation of tariffs on the ground that it constitutes only about 3 per cent of total logistics cost is simplistic.

The jurisdiction, control and operation of the various logistics components are outside the domain of port authorities. The shipping lines have a significant control in the logistics chain.

The port (the licensor) collects vessel-related charges from shipping lines and the terminal operator collects cargo-related charges from the shipping lines.

The Authority has regulatory control over these two types of charges, which account for a small portion of the total logistics cost. In the past, at JNPT vessel-related charges have been reduced.

However, there is no mechanism to know whether such reduction of charges has been passed on to the trade by the shipping lines.

Since the cargo-related charges constitute a small percentage of the total logistics cost, shipping lines always have the flexibility and manoeuvrability to adjust them by revenue streams of other components of the logistics chain.

When more than 95 per cent of logistics cost is unregulated, the demand for deregulation of tariffs will leave the entire sector beyond the reach of any regulation.

Under the existing law, the scope for further regulation is highly limited.

(The author is former Deputy Chairman, Mumbai Port Trust.)

COMMENT NOW