The Indian Container Hub Dream

A significant amount of noise has been created for the need of a container terminal which can serve as international transshipment hub for container volumes destined for India. It is driven more by the fact that, overseas ports of Colombo (closest one) and Singapore share more than two-thirds of Indian transshipped volumes.

As if it is the only savior of Indian ports and proposed economics, every other port with a container terminal has aspiration of transshipment hub. Terminals like Chennai container terminal, container terminal at Vigaz, Krishnapatnam, Ganagvaram , Dhamra etc. on east coast, terminals including DP World run container terminal at Vallarpadam, terminals at Adani run Mundra Port on west coast have voiced similar aspirations. In September, 2012, Vallarpadam which was promoted as India’s answer to rival Colombo & as first transshipment terminal in the country was granted relaxation from cabotage restrictions. Other ports and terminals have joined the chorus for demand of relaxation in cabotage restriction for their terminals since then.

Indian Cabotage laws restrict the coastal shipping in India to Indian flagged vessels, which means that foreign vessels coming to Indian ports cannot transship container between one Indian port to other destination Indian ports. This is often cited as one of the main reason for limited interest of international liners in Indian shipping story.

Beyond the strategic intent to rival growing ports in neighboring countries, there is need to look at economics, infrastructure and other strategic parameters when considering a transshipment port development. There are certain specific requirements for a port to turn into an international transshipment hub, some of them include:

Proximity to international shipping routes

Liners are opting for larger vessels to gain from economy of scale and competitive cost terms. They return to drawing board with larger vessel size on their mind each time. Going by this trend, we will see a few operators running these large vessels and the on the main routes and feeding being done by smaller vessels. Hence to retain the cost advantage, these liners are unlikely to make large detours from shipping routes, unless provoked by large volumes to compensate the cost.

Faster vessel turnaround time

Even for a terminal in close proximity to liner routes, it is their operational efficiency that will drive the port calls. Consider case of two adjoining port A & port B with similar infrastructure and hinterland connectivity and port B has better operational parameters and lesser vessel turnaround time. In principle, even if every element of port infrastructure is same, it is economical for a liner to call an efficient port.

Enhanced multimodal connectivity

Transshipment includes ship to ship and ship to shore transfers which may or may not require temporary storage. An aspiring port need to have a robust multimodal connectivity to enable faster accumulation as well as evacuation of cargo through different modes.

Better port infrastructure

Better port infrastructure includes larger berth lengths, deeper drafts, sufficient quayside equipments, enough areas for storage and yard services, etc. to facilitate larger vessels.

Port costs and tariffs

Given everything in orders, like the operational efficiency, the cost parameters and other duties and charges applicable should be restricted to keep it economical for stakeholder’s compared to rival ports in vicinity.

Cargo volumes

Most essential is the availability of local or origination destination cargo. In Indian context, there is a need to have a viable catchment of smaller terminals to act as terminals ports in hub-spoke system.

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Photo Source: spiderkerala.net

With strong growth of some of the terminals on both coasts supported with deep drafts, better infrastructure facilities and improved operation, there is likely growth of these ports into direct port of call for the liners. For this to happen in an accelerated way, it is required that along with other things, cargo volumes either increases or consolidates on these ports. Factoring in the above parameters, it is essential to give due analysis when considering a hub container port development. Decisions should be backed by evaluation on these parameters, rather than a populist measure or pet political project.

DG Shipping – Right of First Refusal guidelines

Directorate General of shipping (DGS) issued a circular on 26th November 2011, which is touted in the industry as a necessary boost to Indian shipping and shipbuilding industry. The circular modifies the guidelines for grant of licenses under section 406 & 407 of Merchant Shipping Act, 1958 in regard to right of first refusal (RoFR). This is subsequent to guidelines in November 2002 which was followed by another in October 2010. A new order has been prescribed for right of first refusal in super-session to earlier guidelines as followed:

1. Indian built Indian flag vessels

The category introduced in this circular, provides all Indian built vessels sailing under Indian flag which are eligible and qualified as per terms of tender or procurement, a right of first refusal i.e. to match the rates of other categories, if it doesn’t happen to be the lowest bidder. Placing this category at first in the order is a necessary push for Indian companies to have vessels made in Indian shipyards, which in turn is a boost to Indian shipbuilding industry.

2. Indian flag vessels

Next in the order of priority is the all Indian flagged vessels, which will have right to match the lowest bid quoted by subsequent categories, if they happen to be the winning  bidder other than Indian built Indian flag vessels.  This maintains the present status of coastal shipping restricted to Indian flag vessels, to the point and capacities they possess.  This necessitates foreign international players looking for a slice in Indian shipping to have their vessel registered in India and comply by Indian tax codes and regulations.

3. Indian built foreign flag vessels

Further, if the preceding two categories of bidders are not present and if Indian built foreign vessel doesn’t happen to be lowest bidder, this guideline gives them a right to claim right of first refusal and match the otherwise winning bid. Given the limited capacity of Indian operators and complex taxation structure that needs to be followed, it still provides opportunity and incentives for companies to get their vessel built at Indian shipyards. A simple and reasonable taxation will definitely move this category to Indian built Indian flag category.

4. Indian citizens / companies / cooperative societies having bareboat charter and demise (BBCD) vessels.

As in the earlier cases, given that none of the above three categories are bid participants, and these participating Indian entities with BBCD vessels doesn’t happen to winning bidders, in those cases they have the right of first refusal over foreign built foreign owned and remaining categories.

 

To claim the RoFR in the procurement process under any category, the participant will have to be eligible and meet the terms of the procurement. As per the existing guidelines, if more than one participant under a category is eligible for right of refusal, first right of refusal and opportunity to match the winning bid will be given to one with lowest bid.

An inclusive board at NHAI?

The recent news of expansion of NHAI board members to facilitate decision making is a welcome move to expedite projects. The proposal to include economic affairs secretary and similar offices from other ministries from where requisite approvals need to be obtained is aimed to eliminate a layer of approval seeking.  Successful and timely project award and implementation thereafter requires quick, well coordinated, informed and cooperative decision making from all the line ministries involved. Inclusion of representatives from each of these concerned ministries will not only make them aware of the upcoming proposals but will help them understand the stand of NHAI as well as the importance of expedition and quicker decision making.

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But it also makes me wonder, if a mere representation from concerned ministries will solve the sluggish progress we see at NHAI… The empowerment of board is crucial, they should be empowered to take decision related to projects like mode of implementations, on clearances, financing, etc.

The representatives of ministries on NHAI board needs to be empowered as a focal point to address the concerns of NHAI and highway projects in his department and should be of level where they have power to make a call on project decisions.

Again, it requires political and bureaucratic will power to move things in a way forward. Confrontation between ministries needs to be avoided which is possible only if they are on same page as far as project goals and impacts are concerned.

Indian Highways – What Slowed It Down?

The financial year 2012-13 was anything but disappointment on road development in India. There was a tall target to build and at least award projects to the tune of more than 24 km per day through public private partnership and direct EPC contracts which comes to around 9500 km of nation highways in the year. Ministry and NHAI were able to award a meager 1300 km, only a fraction of that on public private partnership. The situation doesn’t look better so far for the seven months till October in 2013-14.

There exist issues that restrain the growth of public private partnerships in general and as listed in my post What ails Public Private Partnerships in Highways in India? As on date, when it comes to award of new projects on PPP, highly leveraged balance sheet, cautious banks when it comes to infra lending and traffic and its growth lower than expectation are some of the major concerns.

Highly leveraged balance sheets of project developers are reality. The approach of NHAI where it tested every project on PPP mode before opting for EPC made things worse for sector by slowing down project award. Lack of projects and cautious lending terms of banks are putting further stress on their financials. Lack of good projects makes them wary of taking any further risk. This is one of the prime reasons for poor interest & participation of in developers in PPP projects in highways. NHAI definitely had constraints on its ability to take all risk and fund the construction where cost escalation was a major feature and delays are inevitable given the state of affairs with land acquisition, clearances and approvals required for projects.

Lending to infrastructure by commercial banks is already stretched to limits. There are fundamental issues of assets-liability mismatch, sector exposure and concentration that banks were already bothered about. On top of it, delays and poor project revenues contributed to bad loans and rising NPAs originating from infrastructure. It is another issue that aggrieved the already maligned state of highways development.

The gloomy macroeconomic factors with sliding growth rate, declining trade volumes, etc. contributed to slow traffic growth on which fell short of rational growth estimates in boom years contributing to poor revenue and stressed debt obligation on project financials.

Recent decision of the Ministry to undertake highways projects on EPC is another attempt to add required thrust for the sector to gain momentum again. But, there is no use in putting EPC projects on block until structural and regulatory issues are sorted out. The success of projects still require timely & complete land acquisition, forest & environmental clearances, proper and timely coordination among different levels of government for utilities shifting and construction work to proceed in addition to timely payments to the contractors. if the Ministry wishes to achieve anything closer to projection of investment and private participation thereof, it needs to better address policy and governance issues.

What ails Public Private Partnerships in Highways in India?

Despite the tangible steps being taken by the government to bring the best out of PPP in roads sector, constraints still persists. Some of them are discussed as below:

Slow award of project

If we look at the target vs. achievement figures of National Highways development on a year on year basis, we will observe there has been a significant drop in the award of project. It point to greater malaise existing in the sector in form of lack of capacity, poor project development and lack of societal stakeholder’s involvement.

Delay in execution of Projects

Even progress on the projects that has been already awarded has not been significant. The delays are attributed to land acquisition issues, poor project management by developers and the authorities. From governance perspective stakeholders’ consideration and consultation is necessary to make a project success, in most of the cases land owners not willing to participate in the process is because of lack of efforts from the public private entities to consult and address the concerns of land owners. Land owners are consulted only in case of their confrontation during execution process by that time contract/concessions are already allotted and only available option is to let the project suffer in terms of delays.

Similarly delays arising out of utilities shifting, environmental and forest clearance are result of lack of involvement of different government agencies during project shaping phase.  Effective governance needs to create a mechanism wherein all the stakeholders affected by the project or likely to affect the interest of the project are taken into confidence, so that their protest or refusal to approve/sanction doesn’t become a hindrance causing delays.

Delay due to poor project management by public authorities & developers needs to be handled through creating capacity at the authority level and developer side.  A governance mechanism needs to be developed wherein past performance of the developer on timely delivery of services need to be considered as one of the factors while selection during project procurement phase. This will be a cognitive governance mechanism which will incentivize the developers due to reputational concerns and relational perspective under shadows of the future.

Dispute resolution concerns

More than 1600 projects are under litigation at different levels according to a PwC report. Disputes arises due to reasons like land issues, approval related issues, delays in submission and acceptance  of drawings and documents, deviations from agreed contractual terms and different interpretation of clauses on the concession. To address the governance issues arising out of that there is a need to create an institutional framework wherein speedy resolution of these disputes can take place. Opportunistic behavior and blame passing needs to be avoided in the interest of project. At both the interface of Public and private and public-private and societal stakeholders, a consultative, transparent, fair process needs to be implemented so as to avoid disputes.

Regulatory issues affecting the project viability

Long gestation period of infrastructure projects before profit is generated creates a viability risk in terms of recovery of capital invested.  Although concessions are shielded from changes in regulatory environment impact, it doesn’t protect project company from increase in rates of direct taxes. Even during period of tax holidays, a minimum alternative tax (MAT) is applicable, which has been increasing over the years and have put viability of a lot of projects at risk.

Contract Management Capabilities

There is a lack of contract administration and effective monitoring. Contractual governance and an effective institutional framework or mechanism needs to be created to achieve sound contract administration, performance monitoring, effective service delivery, and cordial relationship management. There is a lack of institutional capacity that taps learning from past and its implementation for the future projects, i.e. the draft PPP policy calls for VfM analysis but in absence of historical data for state highway projects will it will be a challenge.

TAMP Guidelines for Determination of Tariff, 2013

A new Tariff Guidelines for setting tariff for port services was announced by Ministry of Shipping (MoS) on 31st July 2013. It is aimed to level playing field in Ports Sector by providing flexibility to major ports and private terminal operators at major ports to set market linked tariffs.

The guidelines will be applicable to any Major ports and any other PPP arrangement after 31st July 2013 for a period of 05 years unless revoked or modified earlier. Projects governed by the 2005 Guidelines and the 2008 Guidelines remains unaffected.

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The port trust proposes the reference tariff for each service or category of service along with the performance standards to TAMP. The reference tariff remains the maximum fixed tariff at the concerned major port trust provided with escalation of 60% of Wholesale Price Index (WPI) per annum. In no tariff has been fixed for a commodity in the Major Port, the notified tariff of other Major Port which is representative enough with justification will be considered for reference tariff purpose.  TAMP to notify the said tariff within 15 days of receipt of such proposals.

Port-wise and commodity-wise reference tariff and performance standard to be notified every 05 years as on 1st of April. Subsequent bids to be evaluated on basis of prevalent reference tariff.

Tariff determination for private operator awarded terminal of PPP basis, tariff determination will be as follows.

From Commercial Operation Date (COD) to 31st March of same – tariff limited to reference tariff

From second year onwards – Operator is free to propose performance linked tariffs with tariff cap of 115% of the reference tariff for corresponding year.

Such proposal to be made 90 days before 1st April of the concerned year and operator meeting performance standard has to be supported by certificate from independent engineer as appointed under the concession agreement for the terminal.

Non-achievement of performance standards in last 12 months leads to non-consideration of performance linked tariff notification for the following year.

PPP operator will share revenue based on the reference tariff or the performance linked tariff prevalent in the year. In case the operator charges a tariff less than the notified tariff, the revenue share continue to be linked to indexed or notified tariff for the year.

Similar process is to be followed by terminals owned by the port trusts but the independent engineer certifying the adherence to performance standards would be a panel drawn by Indian Ports Association (IPA).

Ports users can send comments as the proposal would be hosted for the purpose on the website of the Major Port. Captive berths awarded on PPP basis would follow the same process.

Capacity utilization & up gradation of Port Infrastructure

Recent developments at Gateway and other terminals at JNPT will have cost implication for shippers and it has left them seeking for alternate hub for export cargoes. The port of JNPT as a whole is congested and running beyond its capacity. The sordid state of affairs is reflected in increased waiting time for berth, time at berth and overall turnaround time. The service parameters create financial implication for both liners and shippers; as a result it is obvious to look for alternate solution.

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But, where will they go?

The adjoining terminals are faring no better, and faces the same problem of congestion, increasing turnaround time. NSCIT, JNPCT are already running to capacity and have no space and berthing available to accommodate any surge in volume.

The combined capacity of JNPT container terminals is around 4.1 million TEUs per annum and their utilization rates exceeds cent per cent. Past data reveals that JNPT handled more than 4.3 million TEUs.

The capacity addition as planned by JNPT in form of mega box terminal or the fourth terminal at JNPT has been marred by backing out of initial bidders citing different reasons. The container terminal has been floated again for 2nd time and even in the best of scenario, it will take around 3-4 years for it to be operational.

The Mumbai Port in the vicinity offers no respite as it suffers the same problem of congestion and poor service parameters.

The loss for some could be opportunity for others, provided that they are well prepared and ready for that opportunity. Who has such capacity to spare? The question every port eying a traffic snatch needs to answer and plan for. Under present available infrastructure it is natural for shippers as well as liner to opt for Gujrat ports of Mundra and likes. Mundra Port has a capacity of 4.0 Million TEUs at its 03 container terminals one operated by DP World terminals and other two by Adani. These terminals as a whole operate near 70 % utilization level. The south basin terminal has a quay length of 810 meters and drafts exceed 15 meters. It is capable of handling larger and larger vessels and its capacity can be expanded to 5 million TEUs in future.

The additional capacity and ready infrastructure not only enables Mundra port to provide priority berthing but also strengthen its reputation by helping to capture volume surges with consistent service quality.

The winning strategy for terminals is not to bleed the existing infrastructure to choke point but to operate at an optimum level which most experts believe is close to 70% and build additional infrastructure and facilities as the regular volumes catches up with the threshold.

Photo Courtesy: APM Terminals, Mumbai