Private Sector Participation in Ports

Submitted by

Shyam Anandjiwala(2014CEC2720)

Aditi Rajbansh (2014CEC2718)

Private Sector Participation in PortsSubmitted by :

Shyam Anandjiwala (2014CEC2720)Aditi Rajbansh (2014CEC2718)

INDIAN INSTITUTE OF TECHNOLOGY , DELHI

Overview of Indian Ports

Major Ports

12 major Ports

Government of India – Ministry of

Shipping

Major Port Trust Act, 1963

Tariff Regulation (TAMP)

Minor Ports

187 minor ports

State Governments/ State Maritime

Boards

Indian ports Act, 1908

No formal regulator

How it started?

• Policy guidelines (issued in 1997) - enable the major ports to set up JVs with foreign ports, minor ports or private companies

• The Government of India - all new & existing ports will be set up as companies under the Indian Companies Act.

• CORPORATIZATION OF PORTS / PORT TRUSTS

Increase the financial and other powers of the Port Trusts

Better accessibility to funds

Better profitability and performance evaluation

Privatisation

Why PPP in Ports Sector?

• To encourage and increase competition

• To enhance performance

Capacity augmentation and utilisation rates

Increasing efficiency & productivity

to improve port competitiveness

• To attract investments/funding

• Strengthen linkages with global markets

• Strong Global networking

FACTORS FOR DEFECIENCIES IN PORTS

• Designed to handle specific types of cargo

• Under-utilisation of traditional berths and over utilisation of new cargo berths

• Poor equipment utilisation & maintenance

• Absence of inter and intra-port competition to poor inland connectivity

Source :Indian Port Association

PPP Framework for Major Ports

• Regulatory framework

TAMP regulations

Priority to private berthing structures

• Feasibility Study

• Guidelines for privatization

• Tender conditions & procedure

• Foreign Investors

Areas for Privatization

• Leasing out the existing facilities

• Additional assets construction

Construction/operation of container terminals,

Warehousing & storage facilities,

Cranage,

Captive power plants,

Specialized cargo berths,

Dry docking and ship repair facilities

• Leasing of port handling equipment to private sector

• Pilotage and captive facilities

GOVERNMENT INITIATIVES AND POLICY FOR PRIVATIZATION

1• National Maritime Program (NMDP) & National Maritime Agenda

2• Foreign direct investment (FDI) of up to 100% under the automatic route

3• Income tax incentives allowed as per the Income Tax Act, 1961

4

• Formation of JVs between Major Ports and foreign ports, Non-Major Ports, and private companies

5

• Standardisation of Bidding documents (RFQ, RFP and Concession Agreement )

Policy Provisions (Maharashtra Maritime Board)

Development on BOOST basis

• Developer’s selection on MOU basis or by tender if many investors interested.

• Concession period - 50 years.

• Government land on lease, if available, at market valuation

• Equity participation by Government/MMB (maximum 11%)

• Road linkage to nearest State Highway to be part funded by the State and rail connectivity by Developer

• Freedom to fix tariff Policy Guidelines for Captive Terminals

• Land and site for jetty to be leased out for a period of 30 years

Development on Build, Operate & transfer (BOT) basis

• Wharfage charges as per the prescribed rates notified by the State Government

• At the end of 30 years, the jetty, superstructure & facilities on jetty will revert back to MMB.

PRIVATE SECTOR INVESTMENTS

• During the year 2013-14, 16 PPP projects have been awarded at an estimated cost of Rs. 18,640.8 crores for additional capacity of 159 MT in the Major Ports

• Develop 10 coastal economic regions as part of country’s Sagarmala project

• Develop the inland waterway sector for transportation of goods

• Indian ports sector has received FDI worth US$ 1,637.3 million between April 2000 and May 2015

Investments as per the Financial Plans (10th & 11th)

32517

18327

2763

619

5766

4051

0 5000 10000 15000 20000 25000 30000 35000

11th plan

10th plan

Investment ( in INR crores)

Fin

an

cia

l p

lan

Center

State

Private

CHARACTERISTICS OF PRIVATE PORTS

• A benign regulatory framework

• Lack of competition between private operators

• Availability of supportive tariff flexibility

• No high entry barriers

• Heavy positive cash flows

• Strong drivers for cargo growth

PORT MANAGEMENT MODELS

Port Type InfrastructureSuper

structureStevedoring

labourOther

functions

Service port Public Public Public Mainly public

Tool port Public Public Private Mainly public

Landlord Port Public Private Private Mainly private

Private port Private Private Private Mainly private

Source: The World Bank

PRIVATE PORTSADANI GROUP Mundra Port & SEZ–• Largest private port in terms of cargo handled• Draft - deep natural draft availability, long waterfront• Alignment to existing facilities - favorable• Special Economic Zone - 33,000-acre Mundra SEZ • Helps in creating additional demand for cargo traffic

Hazira Port –• Construction & operation concession for 35 years• Hinterland connectivity as it lies on the Delhi-Mumbai corridor• Non-crude extension to the existing Shell terminal• 1,000 metre long channel, a dredging depth - 12 metres , draft of

15 meters and a turning radius of 600 metres

• Mundra Ports and Special Economic Zones (MPSEZ), Essar Ports, Gujrat Pipavav Ports (GPPL), Karaikal Ports (MARG Group)

• The qualitative parameters - Location, Ecosystem, Competition and Parentage.

• Quantitative parameters are – Capacity, Execution Capability, Traffic growth and financial strength

• MPSEZ has the best strategic positioning and long-term growth potential followed by EssarPorts, GPPL and Marg

COMPARISION OF PRIVATE PORTS

Privatization models in Port Sector

• Management model for existing public assets

The private operator has to manage the public assets and make investment for additional infrastructure.

Private operator is provided the right to use these assets in exchange of that. Public sector own these assets throughout the contract period and at the end of this period private operator generated fixed assets are usually transferred to the public sector but the mobile assets of private sector like cranes usually remain with themselves.

Information on transferring of assets at the end of contract period is provided in ‘Transfer-back’ arrangements. There is no compensation provided for transferring fixed assets generally which again depends upon the contract agreement.

Conflicts arise between private operator and public sector over strategy when private operator is not given enough freedom to fulfilpublic sector objectives.

• Development rights model for new port assets

Private operator is given right to build new assets and can use these assets ‘exclusively’ till the end of contract period.

Private operator has to transfer the assets free of cost at the end of contract period.

This model has many variants such as : Freehold of port assets, BOO (Build, Own, Operate) , BOOT (Build, Own, Operate, Transfer). All these models vary according to the terms of agreement.

Freehold of port assets means the outright sale of port assets which is rare.

The only difference between BOOT and BOO is that in BOO model the concessionaire finances, designs, constructs and operates a facility over a given period but it does not transfer to the grantor at the end of concession period.

• Lease contract

Landlord ports lease port assets and can derive substantial amount.

Lease contracts are more popular than the management contacts as it gives more operational freedom to the operator.

Potential lessees can be cargo handling companies, terminal operators, inland transport operators, dedicated terminal operators and shipping lines, forwarding agents etc.

Generally only land or warehouse facilities are leased. Berths can be included or excluded from the lease. If births are excluded then the port authority as usual collects and keeps revenue generated from berthing fees.

• Public private joint venture

The public sector holds a major stake in the SPC (Special Purpose Company) which is set up to hold management contract for existing public assets or development rights model for new port assets.

Such contracts work as the above stated types only but the government holding a higher stake in SPC has an effect on conditions of contract

PPP Variants in Port Sector

PPP ModelOperations &

MaintenanceInvestment

Ultimate

Ownership

Duration

(years)

Rehabilitate, Operate &

Transfer (ROT)Private Private Public 20-30

Rehabilitate, Lease/Rent &

Transfer (RLRT)Private Private Public 20-30

Build, Rehabilitate,

Operate & Transfer (BROT)Private Private Public 20-30

Build, Operate, Transfer

(BOT)Private Private Semi private 20-30

Build, Own, Operate,

Transfer (BOOT)Private Private Semi private 30+

Build, Lease ,Own (BLO) Private Private Private 30+

Full Privatization Private Private Private Indefinite

Source: Hammammi et al. (2006)

Comparison of PPP in Major & Minor Ports

Sr No. Parameter Major Ports Minor Ports

1 Typical nature of PPP

Terminal

development and

operation

Development of

greenfield sites

2 Bidding methodology of PPP 2 stage bidding Bidding/ Nomination

3 Bid parameter Revenue share Revenue share

Per MT royalty

4 Regulated tariff regime Yes No

Case studyKakinada Deep Water Port

Introduction• Located on the southern part of the east coast of India

in Andhra Pradesh

• A part of the Kakinada Port

• Port related operations commenced in November 1996

• 3 berths developed by GoAP till 1999

• Master plan envisaged 15 additional berths with requirement of an investment of over Rs. 1500 crores.

• Lack of capacity of GoAP leading to privatization of port operations

PPP details

• Privatization model – OMST / BOMST

• Concession period – 20 years with an option of 2 extensions of 5 years

• Concessionaire - Kakinada Sea Ports Ltd (KSPL)

• Commencement date – 1st April , 1999

Project details

PHASE 1

OMST Model

O&M of existing 3 berths

PHASE 2

BOMST Model

Construction & Maintenance of 4th

berth when 70% occupancy of 3 berths is reached

Original Concession Agreement

1• KSPL is permitted to levy, collect and retain appropriate

charges from port users

2• KSPL has flexibility in deciding tariff & it is not governed

by TAMP regulations

3

• KSPL has to pay GoAP annually a 20-22% revenue share subject to a Minimum Guaranteed Amount (MGA) clause.

• KSPL also has to pay lease to GOAP for usage of land.

4• All movable assets at the port to be sold by GoAP to KSPL.

Amendments in Concession Agreement

1

• Concession period extended from original tenure of 20 years to 30 years, with a further option for extension by 20 years in two blocks of 10 years each

2• Elimination of MGA clause for revenue sharing with

GoAP

3

• KSPL is allowed to undertake additional or new developments at same terms and conditions of the existing agreement

Asset Handover & Transfer back Clauses

Handover Clause

GoAP

KSPL

Movable Assets(as per rate in CA)

GoAP

Fixed Assets(Free of cost)

“Transfer Back” ClauseFixed Assets(Free of cost)

Movable Assets(as per Book value)

KSPL

Bidding Process• International competitive bidding• 2 stage bidding

PQ (Pre-Qualification) stageRFP(Request for Proposal) stage

• 14 parties selected at the end of PQ stage• 4 consortia selected after RFP stage1. International Seaports Pvt. Limited (ISPL)2. ABG Heavy Industries Limited3. KPB, Malaysia (KPB)4. Kumar’s Marine Engineering Corporation (KMEC)

Evaluation of Bids

Technical criteria

• Master plan for development of facility offered

• Methodology for traffic forecast

• Capital cost estimates

• Organization set-up for project and operational stages

• Productivity norms

• Competency of Project Chief

Evaluation of Bids(Contd…)

Criteria Weight

Minimum Guaranteed Share of

Income (MGA)50%

Percentage Share of Income to be

paid to GoAP30%

Investment Planned in Phase 1

development20%

Financial Criteria

Financing Information

Phase 1: O&M of 3 berths

Equity contribution Rs. 60 crore

Debt funding Rs. 115 crore.

Total investment Rs. 175 crore

Phase 2: Construction and O&M of 4th berth

Total investment Rs. 330 crore

Issues during Project Development

• Non realization of estimated traffic

• Minimum Guaranteed Amount (MGA)

• Competing ports in near vicinity

• Lateral defects in the assets

• Public resistance

• Non level playing field for private operator

Benefits of KDWP Privatization

• Maximization of the Port Potential

GoAP had constructed only three berths and had a master plan envisaging construction of 15 more berths.

GoAP did not have adequate capacity for infrastructure development. The private sector participation ensured adequate traffic to take up the development of fourth berth.

Private operator is looking forward to develop fifth berth.

• Revenue stream to GoAP

Although MGA was eventually withdrawn, the private operator made payments to GoAP in the form of steady revenue share and lease payments

• Improvement in Port PerformanceKSPL has achieved a substantial improvement in

port performance. The total cargo handled at the port has increased from 5.6 million tonnes in FY 04 to 14.5 million tonnes in FY 09 at a CAGR of 21%.

• Demonstration EffectKDWP set an example for port development via

PPP route. It was one of the first minor ports developed with private sector partnership.

Key Lessons & Learning

• Elimination of MGA Minimum Guaranteed Amount (MGA) in addition to the revenue share is a

burden for private party. Government ultimately had to eliminate MGA to save the project.

• Fair opportunity to private operator The government had decided to give full rights to the private party to

develop port at the time of bidding. There were some restrictions from the side of the government in terms of

anchorage port running parallel at the time of award. GoAP restricted the type of cargo handling at KDWP just to keep the

existing anchorage port working. In this way government did not provide fair opportunity to private party. This issue got resolved later on but such issue should not have raised at

all.

• Technical due diligence There were some defects pertaining to the port assets such as

cavities in the diaphragm wall , requirement of boulder removal and requirement of dredging.

As the defects were found at later stage it increased the total cost of the project.

As this was a brownfield project, the government should have done proper technical due diligence of assets before handing it over to the private party so that there is accurate estimation of investment by the private party.

• Dispute resolution by mutual discussions The issue of eliminating MGA, public resistance, terms of

concession agreement etc were taken care by mutual discussions between the government and private operator.

There were no need for any litigation ultimately saving time and resources of both the government and private operator.

Examples of failed bids for PPP in ports

Project Name Revenue Share Reason for Failure/ Delay

Chennai Port Trust -

Mega container

terminal project

Revenue share- 5.25%

Revenue share offered

deemed too low by the trust

Initial bidding saw poor

response

Ennore Port Trust -

Mega container

terminal project

Revenue share- 39.99%

Winning bidder was

unsuccessful in finalizing

funds

JNPT – Container

terminal projectRevenue share- 50.08%

Winning bidder did not sign

concession agreement

Source: TATA Strategic Management Group

Issues with PPP in port sector

• Regulatory issues

• TAMP regulations on major ports

• Poor Hinterland Connectivity

• Administrational issues

• Labour oppositions

• MCA framework

Less flexibility

Non extension of concession period

References

1. Raghuram, G., Udayakumar, P. D., & Prajapati, R. (2015). Effect of Legal Issues in Infrastructure Development: The Case of Container Terminal Bids in Jawaharlal Nehru Port Trust (No. WP2015-10-03). Indian Institute of Management Ahmedabad, Research and Publication Department.2. Siddharth P , Aniruddh R. (2013). Ports by PPP – TAMP as Market Regulator. TATA Strategic Management Group3. Aerts, G., Grage, T., Dooms, M., & Haezendonck, E. (2014). Public-Private Partnerships for the Provision of Port Infrastructure: An Explorative Multi-Actor Perspective on Critical Success Factors. the Asian Journal of Shipping and Logistics, 30(3), 273-298.4. Farrell, S. (2011, January). Observations on PPP models in the ports sector. InCOST Symposium Public Private Partnerships in Transport: Trends & Theory-Research Roadmap, Lisbon.5. Private investment in port sector in India. (2011). Standard Charteres6. http://www.gmbports.org

References (Contd…)

7. http://pppinindia.com/

8. http://www.mahammb.com/

9. http://kakinadaseaports.in/

10. http://planningcommission.gov.in/

11. http://infrapppworld.com/

12. http://www.ipa.nic.in/