The biggest example of government apathy towards major ports is the fact that India’s top two bulk cargo ports – Kandla and Paradip – don’t have full-time chairmen
Like how it has shown its prowess in most other fields, the Indian private sector is already doing a wonderful job when it comes to ports. Not only does it operate the country’s top port in terms of traffic handled, but it also runs India’s top container terminal, despite working with several handicaps like slow environmental clearances, absence of a non-administered tariff regime for the entire port sector and a general suspicion towards them
Sisir Pradhan | June 2015 Issue | The Dollar Business
When Finance Minister Arun Jaitley, while presenting the first full budget of the Modi government, announced that steps would be taken to corporatise major ports, his message was loud and clear. He just wanted to continue from where he had left in 2001 as the Minister of Law, Justice and Company Affairs in the Vajpayee cabinet. Then, in order to enable the corporatisation of major ports, Jaitley had introduced a bill in the Lok Sabha to amend the Major Port Trusts Act, 1963. One of the main features of the bill was giving powers to the Centre to transfer the undertaking of any major port to its successor company, along with the transfer of the assets and liabilities of its Board of Trustees to such successor company, as well as defining the scope of the transfer.
While praising the efforts of private players in India’s port sector, the Finance Minister, in his budget speech, said, “As the success of so-called minor ports has shown, ports can be an attractive investment possibility for the private sector. Ports in the public sector need to both attract such investment, as well as leverage the huge land resources lying unused with them. To enable us to do so, ports in public sector will be encouraged, to corporatise, and become companies under the Companies Act.”
The beacon
India has a vast coastline of over 7,500 km, which is dotted with about 200 ports, comprising 13 major ports and over 180 non-major ports. These ports, put together, carry more than 90% of India’s total EXIM trade volume.
For a long time, India’s maritime trade was exclusively under the control of government-owned major ports. When a consortium led by P&O Australia (now DP World) started trial operations of a container terminal, on BOT basis, at Jawaharlal Nehru Port (JNP) in Mumbai, it heralded the dawn of a new era for the country’s port sector. Today, JNP – India’s busiest container handling port – has three container terminals, of which two are operated by private players. In FY2014, JNP handled 62.33 MMT cargo, of which containerised cargo was 55.23 MMT and liquid cargo was 6.28 MMT, the rest being dry bulk and break bulk cargo. Interestingly, JNP, which handles about 60% of the total container cargo in India, has benefitted immensely from its private terminals. For, out of the total traffic of 4.16 million TEUs that JNP handled in FY2014, the share of JNP-owned JNPCT was 1.31 million TEUs, the share of DP World-operated NSICT was 0.97 million TEUs, while the remaining 1.88 million TEUs were handled by its third and newest terminal Gateway Terminals India (GTI), a joint venture between APM Terminals and the Container Corporation of India Ltd.
The contribution of private ports to India’s EXIM trade is not limited to just container cargo. Even in the bulk cargo category, their contribution is growing by the day. An example of this is Mundra Port, the flagship port of Adani Ports and SEZ Ltd. (APSEZL), which became the first port in India to handle 100 MMT cargo in a year in FY2014. Having signed its concession agreement as late as FY2012 and located just 70 km away from Kandla, the success of Mundra is nothing short of incredible. This, primarily because despite having the entire government machinery and resources at its disposal, Kandla Port has failed to keep up with the demands and requirements of modern day trade. Notably, as compared to Kandla, Mundra handled only 87 MMT in FY2014. Even of this 87 MMT, a majority of liquid and petroleum products were handled by Kandla’s private partner Essar, at its off-shore oil terminal facilities at Vadinar.
From under the nose
For a very long time, Kandla Port was, by far, the top port in the country, in terms of traffic. And one of the primary reasons for this was that it catered to a vast hinterland of 11 states, spread across 1 million square kilometre and the fact that it has been accorded the status of ‘Priority Port’, when it comes to grain exports and LNG, coal, petroleum products, fertiliser and food commodities. Moreover, Asia’s first Special Economic Zone (SEZ) is also located in its neighbourhood. Despite all these advantages, Kandla Port has failed to stay ahead of competition and today, is one of the most congested ports in the country.
According to a Ministry of Shipping report, in FY2014, Kandla not only missed its target of 95 MMT, but also recorded a 7.1% drop in cargo volume. This, more than anything else, is an example of how government-owned major ports are losing out big time to competition from private ports. Pointing out some of the reasons for major ports losing out to private ports, S. S. Kulkarni, Secretary General, Indian Private Ports & Terminals Association (IPPTA), said, “Until the turn of the last century, almost 85-90% of India’s EXIM trade passed through the government controlled major ports. Unfortunately these ports were synonymous for traffic congestion, sluggish clearance of cargo, antiquated equipment and handling practices, labour issues, slow decision making process etc. Following the liberalisation reforms of the early 90s, the central government took an in-principle decision to initiate private participation in the major ports to take care of some of these ills. The result of this is that from handling just 10-15% of India’s total EXIM cargo at the start of the millennium, private ports, together with the private terminals in the major ports, are, today, handling more than 50% of the traffic.”
The best piece of statistics to prove how private ports are in an entirely different growth trajectory is that while in FY1999, Kandla Port handled 40.6 MMT cargo and all intermediate and minor ports in Gujarat, put together, handled just 25.1 MMT, in FY2014, Gujarat’s minor and intermediate ports handled close to 4x of what Kandla handled!
Ruing the day
This is not the situation at Kandla, but at most major ports battling with infrastructure bottlenecks and slow decision processes due to political and bureaucratic apathy. While the government is in now pitching for public-private partnerships (PPPs) for the development of major ports, the reality is that faulty PPP and BOT (build–operate–transfer) models are, actually, slowing down many ports-related infrastructure projects.
One fine example of this was the global tender floated by Kandla Port in the year 2000 to invite bids from private players to develop a container terminal on BOT basis. Post the bidding, Australian company P&O Ports got the letter of intent (LoI), since it quoted the highest bid of Rs.300 crore. However, KPT trustees rejected the offer giving a vague reason that the company’s offer was detrimental to the interests of the port. Three years later, P&O Ports acquired 100% stake in Mundra International Container Terminal, which is now the second largest container terminal in India. Isn’t this hilarious?
Similarly, the best example of government apathy towards major ports is the fact the top two bulk ports of India – Kandla and Paradip – don’t even have full time chairmen! While Ravi M. Parmar runs the show for Kandla from Mumbai, in case of Paradip, M. T. Krishna Babu operates from Visakhapatnam!
Inevitable
Today, India’s total merchandise trade is way below 50% its GDP, whereas for developed countries like Germany, it is 75%. Similarly, India has a total sea-borne traffic of only 950 MMT, with a total coastline of 7,500 km, whereas China’s sea-borne traffic is about 9 billion MT, with a coastline of 15,000 km. Hence, if India wants to get into the big league, a manifold rise in its trade volume is a given. And considering the current state of affairs at major ports, this additional traffic can only be taken care of by existing and new private ports.
Matter of time
Way back in 1995, when the Tata Group and Singapore Airlines joined hands to develop the Bangalore Airport, Airport Authority of India scrapped the project on the grounds that private companies can’t be allowed to build an airport. However, today, Bangalore International Airport is one of the finest airports in the country only because of private participation. Not only Bangalore, if we take instances of other world-class airports in the country like the ones in Cochin, Hyderabad, Mumbai and New Delhi, it’s very clear that they couldn’t have been what they are today without private players. So, the question is: if private players can change the face of India’s aviation sector and provide world-class facilities to users, isn’t it just a matter of time before private seaports replicate the same? As they say, you can delay a revolution. You can’t stop it.
“Private players will run all major ports’ terminals in the future” - Shashank Kulkarni, Secretary General, Indian Private Ports & Terminals Association
TDB: The role of private ports in India’s EXIM trade is increasing by the day. What do you think is the reason for their success in recent years?
Shashank Kulkarni (SK): Until the turn of the last century, almost 85-90% of India’s EXIM trade passed through the government-controlled major ports. Unfortunately, these ports were synonymous for traffic congestion, sluggish clearance of cargo, antiquated equipment and handling practices, labour issues, slow decision making processes etc. Following the liberalisation reforms of the early 90s, the central government took an in-principle decision to initiate private participation in major ports to take care of some of these ills. At the same time, state governments, led by Gujarat, also took initiatives to give out the non-major ports under their control for green-field/brown-field development, through private investment. And the results are there to be seen. From 10-15% cargo handling share at the start of the millennium, private ports, together with the private terminals in major ports, are, today, handling more than 50% of the country’s EXIM traffic.
TDB: What do you think are the main challenges for India’s private ports? Is land acquisition one of them?
SK: While PPP in the port sector has been the most successful amongst all such partnerships in the country, port privatisation has been encountering a number of challenges. Apart from land acquisition, which is more pronounced in green-field development, there are several other issues bogging the sector. Some of these are (a) poor quality of DPR and technical information; (b) an inflexible MCA, which makes it difficult to review concession agreements; (c) slow environmental clearances; (d) absence of a non-administered tariff regime for the entire port sector; (e) lack of coordination between various ministries, which lead to immense delays; and (f) no clarity/uniformity by Customs with regard to certain procedures that are needed to be followed by private terminal operators at major ports.
TDB: Tell us a bit about the average difference in tariff between private and major ports. Should government control over tariffs at major ports be removed?
SK: After faster clearance of goods, port tariff is the most important factor in a cargo owner choosing his/her gateway point. With so much competition, both inter-port as well as intra-port, flexibility in tariff is going to be the key for the survival of any port/terminal. As far as major ports are concerned, they suffer from high vessel related charges (VRCs), which, at times, are the costliest in this part of the world. VRCs of major ports are high since they take into account the high dredging expenses, as well as the pension burden of its vast number of employees. On the other hand, non-major ports, which are free from any tariff regulation, can offer flexi tariff to attract potential customers. One more important aspect that needs to be considered is that port tariff constitutes less than 5% of the overall logistics cost of moving goods. When more than 95% of the transport chain is outside any tariff regulation, is there any need to regulate the balance mere 3-5%?
TDB: Given that the Modi government is encouraging the corporatisation of major ports, do you think private ports will face more competition in the future?
SK: Corporatisation of major ports has been talked about for many years. The only major port – Kamarajar Port at Ennore – formed under the Companies Act has also not been an exemplary instance of a truly corporatised entity. Thus, whether or not private ports will face formidable competition from corporatised major ports will be known only after seeing how much decision making freedom the present port trusts get and how much do they benefit out of it.
TDB: The government is also encouraging PPP at major ports. Do you think there is enough interest for this among existing private players?
SK: After the initial encouragements to private investors, the past 15 years have been a sort of learning period for both the government, as well as the investors. Investors, being commercial entities, have to get a reasonable rate of return for their shareholders. Unfortunately, the tariff policy in major ports has been a huge disappointment. There have been several guidelines till date which themselves speak about the confusion prevailing in the sector. Further, due to the several challenges mentioned above, most of the private players in the port sector are, today, a disillusioned lot.
TDB: Don’t you think India needs to amend its cabotage laws if it really intends to boost coastal shipping?
SK: Coastal shipping, to be a success in India, will depend on how many sailings the shipping industry is able to offer to trade. Trade must have ample choice to load on their cargo onto vessels for domestic movement within the country. Good last mile connectivity is also very crucial for transporters to use coastal shipping. If the Indian shipping industry is able to offer such frequent sailings, cabotage relaxation might not be required. But unfortunately, that is not the case and hence, there is a clamour to allow foreign flag vessels on the Indian coast. It has become a chicken or egg first issue.
TDB: What changes can we expect in the Indian port sector in the foreseeable future?
SK: In the foreseeable future, it is expected that major ports will become landlord ports, with all their terminals being run by private parties. With more and more competition, it is going to be a win-win situation for all.
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