Tuesday, March 29, 2011

Nhava Sheva Container Terminal project: extortionately costly

The actions and inaction of the government, the port trust, and the regulator allow unlawful gains to the private partner at the cost of port users, shows a study commissioned by the Planning Commission. Here’s a PPP that’s not only extortionately costly but also represents abdication of governmental responsibility.

The Centre issued in 1996 the guidelines that recognized that the port trusts could undertake PPP projects under the Major Port Trusts Act, 1963.
The guidelines were aimed at attracting private investment in building terminals and other facilities on build-own-operate (BOT) basis.
The bidders were to indicate an upfront fee for the licence and royalty per ton of cargo to be handled, both to be paid to the port trusts, as well as the minimum guaranteed cargo.
The port trusts were to continue to maintain their regulatory role and “ensure that private investment does not result in the creation of private monopolies.”
The guidelines underscored the need for an independent tariff regulatory authority for determination of port tariffs.
The tariff so fixed would be a ceiling and both the private entrepreneurs and the port trusts would be free to charge less than such notified tariff. Accordingly, the MPT Act was amended in March 1997 for setting up the Tariff Authority for Major Ports (TAMP).
First PPP in port sector
Nhava Sheva International Container Terminal (NSICT) became India’s first PPP initiative in the port sector in July 1997 when Jawahar Lal Nehru Port Trust (JNPT) awarded the BOT concession for the terminal to a consortium of P&O Australia Ports, Konsortium Perkapalan Behrad and DBC group of companies. The consortium was later incorporated as NSICT Ltd.
The project included construction of a two-berth terminal, reclamation of 20 hectares of area for container yards, installation of requisite container handling equipment and other facilities, with a projected capacity of 0.6 million twenty foot equivalent unit (TEU) containers per annum.
The bid conditions did not specify the capital cost of the project.
The terminal was completed at a cost of about Rs 733 crore in 1999, over a relatively short period of two years.
‘Success’ at what cost?
“One view of the partnership is that NSICT has been a runaway success, recording gross ship rates of over 100 moves per hour and average vessel turnaround time of 0.75 days. In April 2005, NSICT handled traffic that exceeded twice the capacity estimated by JNPT at the time of bidding,” wrote Bharat Salhotra in a ‘case study’ commissioned by the Planning Commission and published in November 2007.
“The contrary view is that NSICT made profits far in excess of the permitted returns and that a significant part of these profits could be attributed to monopoly rents arising out of a flawed regulation of tariffs in an environment of inadequate capacity creation compared to rising demand,” Salhotra wrote.
From its inception up to March 2005, NSICT revenues aggregated over Rs 1624 crore out of which 7.2 percent or Rs 117 crore were paid as the royalty to JNPT.
In contrast, between 2000 and 2005, NSICT achieved an average return (post royalty) of nearly 80 percent per annum on its equity, which was four times the stipulated return of 20 per cent, making it one of the most profitable ports in the world, albeit at the expense of captive users.
Inadmissible returns, effete regulation
Over 2002-2005, NSICT extracted inadmissible returns of Rs 524 crore, which translated into annual returns of over 100 percent on its equity.
In the absence of any norms relating to capital and operating costs, TAMP had to rely on the information provided by the ‘regulated’, which was not always dependable or forthcoming, says Salhotra.
The tariff guidelines of 1998 provided for an assured return on equity (RoE), but did not specify a normative debt-equity ratio. TAMP “adjusted” the debt-equity ratio from 65:35, as stated by NSICT, to 50:50 after 2000. (Typically, such ratios for infrastructure projects range from 90:10 to 70:10.)
This “adjustment” resulted in the equity base increasing from Rs 213.17 crore to Rs 304.53 crore for the years 2000-2001 and onwards. That translated into higher tariff, providing greater returns to NSICT at the expense of port users.
Though the revised guidelines of 2005 eliminated the distinction between debt and equity by providing a flat return of 15 percent on capital employed, no attempt was made to specify any norms relating to capital and operating costs that determine the bulk of port tariffs, says Salhotra.
The absence of any norms provides an inbuilt incentive to the concessionaire to overstate costs – capital or operating.
In the matter of tariff setting, TAMP dithered for three years and engaged in half-hearted efforts to solicit cooperation from NSICT, right until 2005, while NSICT reaped ‘undue benefits’ arising out of large increase in traffic. (The tariff should have gone down with the heavy growth in traffic.)
The sharp increase in the volume of traffic was known to JNPT, yet there is no evidence to suggest that in its capacity as a licensor and in discharge of its responsibility under section 42 of the MPT Act, JNPT sought the intervention of TAMP for a tariff review or compelled NSICT to subject itself to a review of tariffs as per law, especially to prevent it from recovering monopoly rents.
The tariff order of 2005 recognised that NSICT had accumulated (post royalty) an excess surplus of Rs 473.42 crore during 2000-2005 over and above the admissible 20 percent return on equity.
In addition, despite admitting that a reduction of 30 percent in tariff was indeed warranted, TAMP reduced the revenue by only 12.8 percent to bring it back to JNPT level.
Ill-conceived policy directives
The Department of Shipping (DoS) and JNPT apparently erred in structuring the project, which involved a tariff model that was incompatible with the bidding model.
The DoS attempted to address this incompatibility through an ill-conceived policy directive on treatment of royalty, which changed the tenor and structure of the entire deal. As a result of this policy directive, NSICT would pay only Rs 2560 crore to JNPT over the concession period against an estimated royalty of Rs 8390 crore, resulting in an undue gain of Rs 5830 crore which would be borne by port users.
TAMP allowed the burden of royalty payments to be passed on to port users even though royalty was the basis on which NSICT was selected. As a result, port users paid over 80 percent more than what was due during that period.
The role of JNPT as grantor of the concession was equally suspect, as it took no steps discharge its statutory duties under the law or the concession agreement and allowed NSICT a free hand.
“When viewed in the light of its extraordinary returns, notwithstanding the rate of return regulation, the project signals an unequal partnership between a private operator, fiercely driven by objective of maximizing returns, and an absentee landlord unable to enforce the basic terms of a badly structured concession agreement, coupled with a weak regulator who chose to be dependent on the ‘regulated’ for determination of tariffs.
This environment provided enough leverage for NSICT to manipulate the deal, ex post, to its own advantage and to the disadvantage of port users,” says Salhotra.
(This article is a summary of the detailed case study of Nhava-Sheva international container terminal project done by Bharat Salhotra on behalf of the Planning Commission. Salhotra currently works as a General Manager for Delhi Freight Corridor Corporation of India Ltd. The full case study can be accessed on the website run by the secretariat on infrastructure of the Planning Commission: http://infrastructure.gov.in/pdf/NSICT.pdf)

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