Why grudge a subsidy for dredging?

Jose Paul | Updated on January 23, 2018

Digging deep: That's the governments job. - CV Subrahmanyam   -  The Hindu

Maintaining waterways is in the nature of a public good. The cost should be borne more by the Centre than by ports

Reports about Indian major suffering losses, with dredging costs becoming hard to manage, have given rise to the question of whether the Centre should subsidise dredging operations.

To answer this, it is necessary to evaluate the externalities arising out of dredging operations and international practices in this regard. It must be stated at the outset that dredging does confer benefits not only on the community of importers and exporters but also on society at large through enhanced trade efficiency.

Expenditure on dredging

The cost of capital and maintenance dredging at all the 12 major ports in India in the year 2013-14 was ₹ 2,470 crore. Kolkata port registered the highest expenditure on maintenance dredging at ₹ 347 crore accounting for about 14 per cent of the total dredging costs. Maintenance dredging over 232 km of the entrance channel contributes to the high dredging costs at Kolkata port.

Recent media reports suggest that Cochin Port Trust is in a serious financial crisis and its net loss was ₹ 107 crore in 2013-14. Cochin Port Trust has stated that it is required to maintain a navigational channel about 13 km long up to a draught of 14.5 m to permit large container ships to call at the International Container Transhipment Terminal at Vallarpadam.

Cochin’s maintenance dredging costs in 2013-14 account for about 4 per cent of the total dredging costs. Negligible sums of annual maintenance dredging have been reported at Ennore, Chennai and Tuticorin, these being artificial ports. The financial performance of all 12 major ports in India in 2013-14 reveals that five major ports, namely, Kolkata, Chennai, Cochin, Mormugao and Mumbai Port Trusts have incurred losses of ₹70 crore, ₹173 crore, ₹107 crore, ₹105 crore and ₹360 crore, respectively. The JN Port, Mumbai, and Paradeep Port have recorded the highest profit of ₹767 crore and 340 crore, respectively.

Economic rationale

One of the most comprehensive legislations on cost sharing in dredging is the US Water Resources Development Act, 1987. Under the provisions of this Act, the Federal Government meets 90 per cent of the dredging costs (10 per cent by the local port authority) for a depth up to 20 feet; about 75 per cent of the incremental maintenance dredging costs is met by the Federal Government for depths up to 45 feet. For depths exceeding 45 feet the incremental cost of dredging is to be borne by the Federal Government and the local port authority on a 50:50 basis.

This implies it is the responsibility of the Federal Government to provide some minimum level of navigational facilities in harbour projects. The US Act provides an instructive parallel for developing countries. The principle that stands out is the rejection of the concept of full cost recovery from direct users/beneficiaries.

This principle seems to have been accepted by Canada, Japan and most West European countries. The largest general cargo port in Europe is Antwerp in Belgium, for which the Dutch and Belgium governments bear the cost of maintenance dredging.

The largest container port in Europe is Rotterdam in the Netherlands and the cost of the maintenance dredging in the maritime access channel is borne by the Dutch government. The entire cost of maintenance dredging of Hamburg port is shouldered by the federal government of Germany.

Benefits of improved access

In a complex economy, it appears impossible to sort out the primary beneficiaries of port dredging, with the result that levying fees from any specific set of users, namely the ship owners and shippers, seems to be inherently inequitable. The dredging service has a ‘public goods’ character as the beneficiaries are distributed across the country. Hence, it is best that the national governments meet the cost of maintaining access channels, navigational aids and communication.

Based on the PC Bhattacharya Commission’s recommendations the riverine port of Kolkata has been receiving a central subsidy on maintenance dredging initially at 80 per cent, which was progressively enhanced to 100 per cent. The commission stated on page 85: “It is recommended that Government should agree to bear with effect from 1968-69, as a permanent measure 80 per cent of the total cost for maintaining the navigability of the river channel and 80 per cent of the cost of river maintenance inclusive of debt charges, Port Commissioners continuing to bear 20 per cent of the such charges. ”

The justification is that Kolkata port is situated on river Hooghly which permits inland waterways to penetrate deep into the hinterland of West Bengal. At the international level the US, Canadian, European and Japanese governments seem to have recognised the economic logic of cost sharing with the regional port authorities in view of the spill over effects to the respective national economies. It is only logical for the central government to share the cost of maintenance dredging.

Cochin Port merits subsidy

The central government has already provided a four-lane highway connectivity to the container terminal over a distance of 17 km at a cost of about ₹1,000 crore. It has also provided rail connectivity over a distance of over 5.6 km at a cost of about ₹560 crore.

In addition, it has also developed National Waterway No 3 to provide inland waterway connectivity. The circle of connectivity will be completed only when the Centre meets the cost of upkeep of the approach channel on the seaward side.

When the cost of maintenance dredging is subsidised by the Central government, Cochin port will be able to offer significant concessions to container shipping. It will be able to compete effectively with Colombo and Singapore on the East and Dubai and Salala on the west in transshipment trade in terms of tariff, service quality and performance.

The Malaysian government has gone far ahead in developing their Port of Tanjung Pelepas situated just 50 nautical miles away from Singapore as a transshipment port to compete with Singapore.

It has made available land at concessional rate, supporting the port infrastructure cost and meeting the cost of upkeep and maintenance of the maritime approach channels. With such strategic and financial support, the Port of Tanjung Pelepas has now become the 19th largest container port in the world.

Seaports help move massive quantities of import and export trade. The beneficial effects of upkeep through dredging are reaped both by the shippers and ship owners as direct users and the larger community of tax payers as indirect beneficiaries.

Subsidy entails making the larger community pay their fair share for a public good. What’s wrong with that?

The writer is a former acting chairman of JN Port, Mumbai, and a former chairman of Mormugao Port Trust. He is a visiting professor of Maritime Universities, Chennai

Published on April 28, 2015

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