Smooth Seas Ahead?

India´s port infrastructure - a critical resource for the country´s prosperity - has so far failed to reach its potential. Will the new government´s policies bring a turnaround? RAMESH K VAIDYANATHAN and ARVIND RAVINDRANATH take a closer look. Socialism is defined as a ´social organisation that advocates that the means of production are owned and regulated by the community as a whole ´. The Constitution of India´s Preamble states that India is a ´Socialist´ Republic. Consistent with this thought, one had hoped that a critical resource for India´s prosperity, its ports and coastline, would be utilised efficiently, under the tight control of the State, for the economic prosperity of the people. The experience, unfortunately, shows otherwise. The Major Port Trusts Act, 1963 (MPTA) was enacted by Parliament to ensure that the ´Major Ports´ of India would be owned, operated and regulated by the Central Government under the auspices of a socialist state. MPTA regulates the functioning of 12 ´major´ ports in India and puts them under the control and authority of the Central Government . The major ports are effectively constituted as ´trusts´, which are meant to be for the benefit of the public at large as they are considered to be critical infrastructure for use by the community. Over the years, however, complacency has set in and the trusts have not been managing the ports well enough. With set tariffs and lack of competition, the major ports did not focus on profitability and throughput. There was no market incentive to perform better. The ´Turnaround Time´ for ports in India is an average of three days compared to one day in Singapore. This is despite the fact that a ´capitalist´ Singapore had its ports operated by a combination of private and public-sector terminal operators, the largest among which is PSA Corporation (owned by the Singapore government). By the 1990s, when India started opening up to the world, it was clear that India´s ports were woefully unprepared for the surge of traffic headed their way. The Government of India, which is usually hesitant to invite private foreign investment, did so in 1997 when Nhava Sheva International Container Terminal (NSICT) was set up within the Jawaharlal Nehru Port Trust (JNPT) in a public-private partnership (PPP) with P&O Ports, Australia. Currently, the terminal is operated by Dubai Ports World, which inherited it after it acquired P&O in 2006. The invitation of foreign private investment to ´socialist´ India´s ports may be long overdue. However, merely inviting investment is insufficient if the investors don´t have the required autonomy to conduct business. As stated earlier, major ports in India have their tariffs set for them through the Tariff Authority for Major Ports (TAMP). TAMP regulates and sets the tariff for 11 of the 12 major ports in India (barring Ennore Port, which is a ´company´ and not a trust). TAMP was introduced as an amendment in the MPTA in 1997 and was intended to reduce the burden on the Central Government to periodically decide the tariffs for the major ports. TAMP sets its prices on a ´cost-plus´ basis and, oddly enough, this used to punish terminal operators for increased efficiency for performing above assessed throughput levels. Private terminal operators at the major ports consider the presence of TAMP to be a nuisance as it does not allow them to set tariffs based on market rates. The associated loss of revenue and resulting lack of investment have lead to major ports losing out to other unclassified ports (´minor ports´) in market share. In the 1990s, the minor ports had a market share of less than 20 per cent. Now, with improvement in the infrastructure at the minor ports owing to tariff flexibility, their market share has approached the 50 per cent mark. India´s largest port by cargo throughput is not Kandla Port Trust (set up in the 1950s) but Mundra Port, a private ´minor port´ owned and operated by the Adani Group that was set up only in 1998. The artificial segregation of major and minor ports by the government has only left national assets inefficiently utilised. Be that as it may, two major developments brought in by the Modi Government give hope that ports have the potential to overcome these issues in the future. Earlier, in July 2013, the Government had announced a market-linked tariff policy, but this only applied to all new projects commencing from that date. However, the new Tariff Policy for Major Ports, 2015, notified by TAMP on January 27, 2015, will benefit even the older operating major ports. The new policy envisages that major ports would be able to set their tariffs based on their ´annual revenue requirements´ (average actual expenditure over three years plus return of 16 per cent on capital employed). This tariff will in turn be indexed to the Wholesale Price Index (WPI). Further, unless the port trusts manage to meet certain defined performance parameters, they will be denied the benefits. However, the bigger question remains, why regulate tariffs at all? The government is also moving in this direction. Efforts are on to amend the Major Port Trusts Act in order to reverse the 1997 amendment that introduced TAMP. The Shipping Ministry is actively considering the Port Laws Amendment Bill, 2014, which proposes to wind up TAMP in its present form. It may only be a matter of time before TAMP ceases to exist. In the interim, the major ports need to be set free of the onerous regulation by TAMP. For this reason and others, a plan mooted by the Finance Minister during the Budget speech for 2015-16 was to propose the ´corporatisation´ of ports. This process basically envisages that the port trusts be converted into companies accountable to their shareholders. This proposal would yield a two-fold benefit. First, it would permit the newly formed port companies to issue shares to private investors. Second, allows the port companies to work as legitimate profit seeking entities and allows them to monetise their vast tracts of landholding and other assets, thus generating much needed revenue for the government. Ports can thus operate on an asset-light, ´landlord model´ that only requires them to own the facility and the critical skeletal infrastructure while the actual port terminal operations can be outsourced to specialised terminal operators. For several years now, global operators have been ruing India´s shoddy port infrastructure. Opaque and onerous government rules coupled with stifling regulation have prevented India´s port infrastructure from reaching its potential. The importance of a country´s port infrastructure cannot be overstated. By being gateways to the world, the quality and quantity of ports directly affect transaction costs and competitiveness of the country´s wares in the world market. It is no coincidence that China is not only the world´s largest exporter but has the world´s largest ports. It is, therefore, welcome news to hear that the new government is proactively seeking to improve things. About the Authors: Ramesh K Vaidyanathan is Managing Partner of Advaya Legal and Arvind Ravindranath is an Associate at the firm. Advaya Legal is a commercial law firm that represents clients in the infrastructure, construction and real-estate sectors. To share your legal perspective, write in at feedback@constructionworld.in