Real concession reform?
COMMENT: India has released details of a proposed new model concession agreement which is designed to reform its terminal bidding process and attract more private sector investment.
The new model is released against a background of a number of previously awarded concessions failing and other concession holders embroiled in lengthy disputes with the host port as a result of operators deeming current concession arrangements unworkable. The new model is additionally designed to complement India’s Sagarmala development initiative which aims to realise extensive port system modernisation and the delivery of efficient interfacing rail and road systems.
The Sagarmala programme foresees spending of up to $11bn over the next five years, adding in the order of 1,500m tonnes per annum of new capacity including the development of a number of new greenfield ports. A figure of $3bn is quoted with regard to projected investment in numerous ‘last mile’ port rail links.
Under the new model concession agreement charges for additional land utilities and services provided by the port to an operator will be reduced and discounts will be offered against the published tariffs of terminals. Under the current concession payment system, revenue share is payable on gross revenue as determined by published tariffs and does not take into account tariff reductions. The proposed change recognises that discounts are an essential part of being competitive and consolidating and expanding the customer base. They will, therefore, be factored in to the concession charge calculation.
Further the new agreement a moratorium on the set-up of competing facilities for five years or 75% of existing capacity, is to be reduced to three years or 70% of existing capacity.
Operators will now be able to issue bonds to refinance debt after one year of operation – to facilitate the optimisation of financial arrangements.
Also, the agreement offers compensation for operators should changes in law occur including the imposition of new taxes and duties and environmental and labour laws that impact the financial viability of projects. This does not apply, however, to what is known as the New Direct Tax – itself the source of some controversy in Indian government circles.
Operators will be given the option to exit projects early. Concession holders presently have to maintain their equity stake in project special purpose vehicles for six years but the new model concession agreement enables them to exit after three years given that agreed performance levels have been achieved.
There are revised rules on entities and consortium. New ownership arrangements for the port terminal will be permitted subject to the eligibility requirements laid out in the bid documents for the project. Additionally, new facilities and equipment can be added to achieve better performance and make better use of assets - this removes previous doubt on this subject area.
Lastly, operators will be afforded a stronger say on some operational issues. Notably, this will include the possibility to allow preferential berthing on the basis of priority berthing pre-agreed with the port authority.
The proposed new concession arrangements do reflect a certain liberalisation and better understanding of the practicalities of concession arrangements. Ultimately, however, they do not reflect a spirit of laissez faire in conjunction with the private sector. There are still considerable ‘strings’ attached to terminal concession agreements in India to the extent that they provide an added challenge to management to navigate a new concession to success. Indeed, while the format of these ‘strings’ is changing it is noticeable that well beyond the first generation port privatisations the scale of direct government intervention in concession arrangements has not reduced.
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