India’s headway on thorny reforms

Krishnapatnam Port, a private port on the east coast of India, is developing as a hub port
Private operators with terminals at Jawaharlal Nehru Port have benefitted from a developed support system. Credit: APM Terminals
Private operators with terminals at Jawaharlal Nehru Port have benefitted from a developed support system. Credit: APM Terminals
APM Terminals has investments in both Indian models through Pipavav (pictured) and a terminal JNPT. Credit: APM Terminals
APM Terminals has investments in both Indian models through Pipavav (pictured) and a terminal JNPT. Credit: APM Terminals

Coupled with reforms to cabotage law, a revamp of tariff rules is expected to spur Indian port investment, finds Dave MacIntyre.

For years, the issue of the TAMP structure in India's ports has been bubbling away, with discontent over the fairness of Government-imposed restrictions on tariffs, but now it seems some liberalising reforms may invigorate investment in the country's ports.

A rework of the laws governing TAMP ports – ports governed by the Tariff Authority of Major Ports – combined with a relaxation of cabotage laws governing transhipment cargoes around the coast, are combining to offer new possibilities for both ports and the shipping lines they serve.

The term ‘major ports’ represents the government-owned ports which have been run as trusts to provide essential services. These assets have appreciated in value over the years and many are strategic, hence the belief that the Indian Government needed to regulate them.

Non-major ports are under state jurisdiction. The states are free to develop such ports and new locations with private players without any control or restriction on tariffs. This divergence creates major differences in their way of doing business, although both major and minor ports face challenges.

The Major Port Trusts Act, 1963 governs the central government-owned ports and restrictions on tariffs were introduced in 1997 through TAMP, covering port services, land leasing, PPP projects and expansion.

TAMP has been prepared to enforce strict control in the past. In 2012 for example it reduced rates at two of the largest terminals in Jawaharlal Nehru Port Trust (JNP).

The major ports argue this control makes it hard for them to adjust pricing in line with changing market conditions, discouraging them from reinvesting in assets. Privately-operated minor terminals have on the contrary been investing heavily in capacity and gaining market share.

Strengths and weaknesses

Indian ports consultant Surendra Sharma says that while greenfield ports don't have the tariff restrictions of the major ports, the two have different strengths.

“The Government view was that investment in major ports comes as a package deal with existing developed infrastructure and cargo support. Hence it cannot be exploited for profit by private companies who are there only for a limited period.

“When major ports like JNP transformed to a landlord model and started inviting private players to develop additional berths and run the terminals, it was a known fact that ports were under the trust model.

“Private companies who have developed terminals at JNP have got the benefit of the developed support system and have generated good volumes in a short period to recover their investment. Hence the tariff ceiling is not on making profits but on higher profits.

“Major ports cannot be compared to new greenfield projects where the risks are higher and returns delayed – the investor has to develop everything and may or may not succeed.”

He summarises the pros and cons as: “Private terminals in the major ports have an advantage in the short- and medium-term as they get a plug-and-play model, while new greenfield non-major ports under the state governments benefit in the long run with free tariffs as supporting infrastructure develops and cargo volumes gradually increase.”

An example of an operator with an investment in both models is APM Terminals, with a major port gateway at JNP and a minor port at Pipavav.

New reforms

For years there have been demands to loosen the limitations of the trust model and to bring a more corporate approach to the major ports. India's new National Democratic Alliance government is committed to reforms and improving logistics policies and infrastructure, and two principal pieces of legislation are having a particular impact.

The new Major Port Authorities Act 2016 (MPAA) replaces the 1963 Act and gives the major ports more freedom to work out fresh terms for new projects and ensure migration for TAMP-regulated terminals to market-driven tariffs.

In PPPs, the concessionaire will be free to fix the tariff based on market conditions. An independent review board will resolve disputes between ports and PPP concessionaires, will review stressed PPP projects and suggest remedial measures.

The second major change is the relaxation of cabotage rules, allowing foreign-flagged container ships to carry export-import laden containers for transhipment and empty containers for repositioning on local routes without a licence or conditions.

Previously, new or existing container ports handling such transhipment traffic had to apply to the Directorate of General Shipping for a cabotage relaxation licence. Domestic shipping operators could object to the granting of a licence.

As foreign shipping lines were not permitted to operate their feeder ships along India's coastline, many chose to use nearby foreign hubs instead of Indian ports. They tranship cargo destined for India on their foreign-flagged feeder ships, thereby not violating the restrictions on cabotage.

The change was lobbied for by global container lines who saw it as essential to setting up transhipment hubs in India, rather than relying on foreign transhipment hubs such as Colombo, Singapore, Port Klang and Jebel Ali.

The Indian Private Ports and Terminals Association (IPPTA) also backed the container carriers in a move which could boost transhipment terminals at, for example, DP World's Cochin Port facility; Mundra Port run by Adani Ports and Krishnapatnam Port run by the CVR Group.

Deepak Tewari, chairman of the Indian Container Shipping Lines' Association, predicts the change will lead to a drop in feedering rates and will encourage use of Indian ports and terminals for aggregation and transhipment.

Positive development

Shailesh Garg, head of Drewry's Delhi office, says the liberalisation of the cabotage law is a positive development for foreign shipping lines and if it helps in boosting container traffic at Indian ports then surely it is a better climate for investment.

However, he adds: “... it alone will not encourage investment in Indian ports, although it may help some ports which are targeting container transhipment business like Mundra, Vizhinjam and Vallarpadam.

“Investors will also be looking at gateway volumes, the demand-supply gap and competitive environment. We are already witnessing an oversupply of container-handling capacity in certain pockets on the east and west coasts of India, leading to lower capacity utilisation and profit margins.”

This is making investors cautious and Mr Garg feels those ports offering strong hinterland growth will be better positioned to attract investment.

“India needs to invest and develop land-side infrastructure for efficient evacuation of cargo and to reduce the overall inland transit time and cost. This will make Indian ports more competitive and attractive for investment.”

Consultant Surendra Sharma summarises the investment outlook by saying the TAMP changes, allowing new projects under PPPs to be market-tariff driven, along with the cabotage law relaxation, lays the ground for development of mega ports already identified under India's Sagarmala programme for investment by foreign companies.

“The government, by relaxation of export-import cargo for coastal movement, is trying to stimulate and encourage transhipment at Indian ports. The next logical step would be augmenting [those] Indian transhipment ports' capacity [which are] facing infrastructure constraints.

“Government has already identified strategic deepwater sites for greenfield transhipment ports. Pre-feasibility studies covering techno-commercial aspects have also found them viable. These projects would open a full range of opportunities for investors in the hub segment.

“A foreign port can join with an Indian port to develop such a new greenfield deepsea port on a landlord model. Terminal operators and shipping lines can participate by developing berths under PPP projects for their ships,” says Mr Sharma.

“India's own growing cargo is a big plus for such hub projects and relaxation of coastal shipping for export-import cargo makes it more promising to link small and regional ports into the hub.”



KRISHNAPATNAM READIES ITSELF FOR THROUGHPUT GROWTH

Within the Indian ports industry itself, private ports are preparing for an increase in cargo. Vinita Venkatesh, director of Krishnapatnam Port Container Terminal (KPCT), says a relaxation in cabotage laws looks poised to induce higher cargo throughput at Indian ports, including Krishnapatnam.

The port has a 1.2m teu terminal with a current throughput of 0.5m teu per year, but sufficient capacity to handle additional volume growth.

“KPCT is well equipped with a large land area, deep draft, high-speed operations and competitive tariff to service the requirements of the transhipment cargo of both the Indian flag as well as the foreign-flag carriers.

“Furthermore, we have land area allocated for the construction of an additional 4.8m teu terminal capacity with 21-metre draft in preparation for the growth in transhipment cargo,” she says.

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