CHAPTER VI PRIVATISATION OF INDIAN PORTS World over ports are passing through a phase of structural transformation- Ports in India being no exception. Indian Ports are governed by the Indian Ports Act, 1908 & Major Port Trusts Act, 1963 and function as autonomous bodies under the Ministry of Shipping. Indian ports (12 Major Ports) are highly labour intensive yet work at 105% of their capacity as compared to other modern international ports which work at 55%-65% of the capacity. Recognising the need to attract modern technology, introduce better managerial practices, expeditious implementation of schemes and the huge investment, the Government has decided to encourage private participation in ports. The public-private endeavours in the port sector so far, have yielded positive results. Efforts should be made to synergise the strengths of the trading partners, in order to improve the productivity and profitability of the port sector so that there is a concomitant benefit to all the port users. This in turn will make the Indian products more competitive internationally. Current scenario On the 5560 kms stretch of coastline, India has 12 Major Ports (including Ennore Port, just inaugurated) and 148 Minor Ports (30 contributing to cargo handling). The major Ports are literally bursting at seams. They handled 284.31 million tones of cargo in 2001-02 against the available capacity of 269.87 million tonnes - a capacity utilization of 105.35%. Contrast this with the global scenario where most ports operate at 55-56% capacity. This is against the backdrop of the fact that most of the Indian Ports are highly labour intensive and work using antiquated equipments. Besides, the ports have to make use of the available
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CHAPTER VI
PRIVATISATION OF INDIAN PORTS
World over ports are passing through a phase of structural transformation-
Ports in India being no exception. Indian Ports are governed by the Indian Ports
Act, 1908 & Major Port Trusts Act, 1963 and function as autonomous bodies
under the Ministry of Shipping. Indian ports (12 Major Ports) are highly labour
intensive yet work at 105% of their capacity as compared to other modern
international ports which work at 55%-65% of the capacity.
Recognising the need to attract modern technology, introduce better
managerial practices, expeditious implementation of schemes and the huge
investment, the Government has decided to encourage private participation in
ports. The public-private endeavours in the port sector so far, have yielded
positive results.
Efforts should be made to synergise the strengths of the trading partners, in
order to improve the productivity and profitability of the port sector so that there is
a concomitant benefit to all the port users. This in turn will make the Indian
products more competitive internationally.
Current scenario
On the 5560 kms stretch of coastline, India has 12 Major Ports (including
Ennore Port, just inaugurated) and 148 Minor Ports (30 contributing to cargo
handling). The major Ports are literally bursting at seams. They handled 284.31
million tones of cargo in 2001-02 against the available capacity of 269.87 million
tonnes - a capacity utilization of 105.35%. Contrast this with the global scenario
where most ports operate at 55-56% capacity. This is against the backdrop of the
fact that most of the Indian Ports are highly labour intensive and work using
antiquated equipments. Besides, the ports have to make use of the available
(limited) financial resources to address their development/investment
requirements.
Privatisation - Raison D'etre
By virtue of being a vital infrastructure that is critical to the trade and
commerce, the Ports exert a powerful influence of the present standing and the
future progress of the economy. As at present and as the trends show, the demand
far surpasses the capacity. According to "Vision 2020" report by the RITES, the
traffic projection for year 2003 is 365 million tonnes and it will be 530 million
tonnes by 2007. This calls for a massive augmentation of the capacities to meet
the demand. The total requirement of funds during 9th Plan (upto March 2002) is
Rs.13,550 crores of which Rs. 6550 crores will come from budgetary support and
Rs.7000 crores from Private Sector Investment. The task is colossal and requires a
high magnitude of investment.
Initiatives
Recognising the need to attract new technology, introduce better
managerial practices, expeditious implementation of schemes and the huge
investment, the Government decided to encourage the participation of the Private
Sector in the Ports and accordingly in October 1996 issued policy guidelines. To
facilitate private investment, the Government of India has provided a number of
fiscal incentives also.
The areas that have been identified for Private Sector participation are:
> Construction/installation & operation of liquid bulk, break bulk, multipurpose
and special purpose berths;
> Container Terminals;
CFS, Tank Farms and Storage facilities;
> Cranage/Handling equipments;
> Leasing out existing assets;
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> Leasing in of Cargo Handling Equipment & Floating Crafts; and
> Captive Facilities for Port Based Industries.
Port Policy
Port Policies will have to be more proactive to the needs of the consumer:
> Port policies need to reflect and respond to the continuous changes in macro-
economic policies, in particular the move towards a more open Indian
economy.
> Ports should remain statutory bodies but evolve towards the "landlord" rather
than the service port.
> Operations should be organized within a system of integrated terminals, partly
owned, but fully run by qualified private operators capable and willing to
invest in superstructures and equipment, and organized on the principles of
unity of command and specialization.
> Financial managements and pricing policies should lead to transparent and
cost-based tariffs which optimize the use of resources and minimize cross sub-
sidizations;
> Public investment should be limited to the infrastructure needed to facilitate
growth and development;
> Private initiative in the provision, funding and operation of superstructure and
equipment should be encouraged.
Solicited Projects
A solicited project is identified and formulated by the Govt. with necessary
pre feasibility, feasibility, detailed studies for its essential viability and private
sector participation. Solicited projects undergo through analysis and integrated
into the country's overall infrastructure system and in the developmental plans.
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Unsolicited Projects
This is identified and proposed by a private sector promoter to the port for
an exclusive right to develop and operate the particular project/system for a
particular period. These are considered on exceptional basis for its need.
Different concepts
There are different schemes available under the privatisation concept. The
Govt. has preferred the BOT scheme in the infrastructure facilities such as port,
Roads, etc. This approach increases the risks associated with infrastructure project
to a level of acceptance to the private sector. It also assures that profits generated
are commensurate with the risks. In BOT concept a contractual agreement is
made where a private investor can finance, construct, operate and maintain the
port facility for a concession period after which the facility is transferred to the
port authority at no cost.
DIFFERENT SCHEMES OF PRIVATISATION:
Build - Operate- Transfer (BOT)
Provides private consortia with a concession to finance, build, operate and
maintain a facility. During the life of the concession, investors collect user fees to
cover the costs of construction, debt servicing and operations. At the end of the
concession the facility reverts back to a public authority.
Build-Own-Operate-Transfer (BOOT)
Same as BOT, after a negotiated period of time, the project is transferred to
the Government.
Build-Transfer-Lease-Operate (BTLD)
Government provides the right way on which the facilitates agreements
required by the concessionaire to pay a nominal rent of payment for the use of the
land.
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Service Contract
More narrowly focussed than a management contract is that a private
contractor performs a particular operating or maintenance function for a fee over a
specified period of time.
Besides adding credibility to the project, the BOT scheme can also lead to
significant cost economies accruing out of a more focussed private control and
economic interest in design, construction, technology, and operation of the project.
The continued involvement of the sponsors during the life of the concession also
implies a constant transfer of technology. A successful BOT project means that the
Government creates vital infrastructure without putting pressure on budgetary
funds, and has facility with better efficiency of operation. Unless all involved, work
in cohesion with proactive thinking, coordinating, cooperation, mutual trust and in a
continuous manner, the complex BOT concept cannot lead to success.
Success Links
Success factors for the port/Govt. to promote BOT projects are:
> The project must be financially sound, feasible and affordable.
> The country risks must be manageable
> There must be strong Govt. political support.
> The legal frame work must be stable.
> The administrative frame work must be efficient.
> The project must rank high on the host Govt. list of infrastructure projects.
> The bidding procedure must be fair and transparent.
BOT transaulations should be concludable within reasonable time and cost.
> The sponsors must be experienced and reliable.
> The sponsors must have financial strength.
> The construction contractor must have experience and resources.
> Project risks must be allocated rationally.
> The financial structure must provide the tender sufficient security.
> The public and private sectors should cooperate on win-win basis.
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Initiatives of Govt
The Govt. has understood that unless the incentives are provided there will
not be takers in cost intensive port privatisation projects. Hence the Govt. has
highlighted and liberalised the measures as under;
> Existing legal frame work permit private sector participation.
Port will regulate as per the Major Port Trust Act.
> An independent Tariff authority has been established to induce confidence to
the investor and have a level playing field.
> Tender with the transparent conditions shall be put on BOT basis.
> Proper feasibility report shall be made at the expenses of the port but
subsequently recovered from the successful tenderer,
> Evaluation is made transparent as per the criteria indicated in the Tender.
> Concession period is 30 years.
> Automatic approval of an Indian company with 74% foreign equity.
> Even upto 100% foreign equity shall be considered by the FIPB (Foreign
investment Promotion Board)
> Tax holiday for 5 years and tax concession for another 5 years within 12 years
for infrastructure project.
> Customs duties for imported equipments are drastically reduced.
> Subscription to debentures or equity of companies engaged in infrastructure
would qualify for income tax relief for the investor.
> Infrastructure development financing company (IDFC) has been set up for
financing infrastructure project.
> HUDCO also proposed to finance such projects.
> Model tender document has been prepared.
> Bankable agreement has also been prepared so that the entrepreneurs would be
able to raise funds.
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The special committee for infrastructure headed by the Prime Minister and
concerned Minister Paves the way for removing the bottlenecks, and ensure
smooth progress under BOT concept.
> Leasing out exiting assets of the port.
> Construction & creation of additional assets, such as;
a) Construction & operation of container terminals
b) Construction & operation of bulk, breakbulk, multipurpose & specialised
cargo berths.
c) Warehousing, container freight stations storage facilities, and tank farms.
d) Cranage & handling equipment.
e) Setting up of captive power plants.
Dry docking and ship repair facilities.
> Leasing of equipment for port handling and leasing of floating crafts from the
private sector.
> Pilotage.
> Captive facilities for port based industries including captive oil facilities and
SBMS.
Criteria
Some of the criteria to qualify as a Private Sector Partner are:
Experience of managing facility for similar cargo with average annual volume
for last 3 years equal to at least 50% of the proposed capacity of the
terminal/berth under bidding;
> A bout 20% of the net worth of the bidder should be at least equal to the 50%
of the estimated project cost; and
> Aggregate net accruals during the immediately preceding 3 years should at
least be equal to 50% of the estimated project cost.
Privatisation - Objectives
The generally accepted outlook towards the privatisation of the Ports is as a
means for increasing private enterprise participation in the operations of Major
Ports and it does not mean sale of Major Ports' land, which remains under public
ownership. The idea is to make use of private investment technology & modern
management concepts to increase port productivity and to modernize port facilities
and thereby to make cargo handling cost effective and thus in turn making Indian
trade & products globally competitive.
Assessing the true extent of privatisation in ports requires careful analysis
of distinct activities, roles and responsibilities that are now being undertaken by
the public entity to the private sector. Basically this involves three elements that
can be either collectively or individually be privatized, viz.,
a) The Regulatory Functions: These are the functions that are empowerments
by way of statute(s) and include activities like maintaining, etc. The Welfare
State notion under the ambit of which these functions are imposed on public
entities (ports), leave little or no room for these regulatory functions to be
transferred to the private sector. It would also incapacitate the public bodies to
the extent that while doing the public good, they will have to simultaneously
compete with other private agencies on an uneven plank.
b) The Land Resources: Ports are the proverbial "realtor" in the sense that they
hold a vast area of land. World over, ports hold maximum of estate, next only
to the municipalities. Land is a scarce resource and has to be put into the most
judicious use; more importantly for port related activities that add up to the
cargo and vessel traffic volumes at the ports. Special Economic Zones
involving some manufacturing/assembling that is export-import oriented would
fall under this category of activity.
c) The Port Operations: This is the most significant of the three elements under
analysis for private sector involvement. The traditional port operations involve
the handling of sea-borne cargo and passengers. It also includes under its
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ambit value added services such as warehousing, container freight stations,
storage, tankage, etc.
A right mix of these key elements will lead to a purposeful public-private
participation and derive mutually beneficial results. For instance, the private
sector can discharge the dominant role of service provider (operational) and the
public sector can back up the regulatory functions. Another option could be that
the land ownership rests with the public sector and the regulatory or operational
functions are the responsibilities of the private sector. A third scenario could be
that all the three elements are transferred to the private sector. Thus the public-
private synergy is in the right proportion and after a diligent analysis will aid in
shaping the economy in right perspective, port sector in particular.
Privatisation - Approach
Against this backdrop, the methods identified by government for attracting
private investment are:
a. Immediate steps
- Leasing of existing assets; and
- Joint venture between ports & private companies or consortia of private
companies.
The Major Ports have been quick to react to the Government policy to
invite private participation in leasing of existing assets. As on date, some of the
key projects in operation are:
> Jawaharlal Nehru Port Trust - Nava sheva International Container Terminal:
container Terminal being operated by MIs P&O.
> Kandla Port (KPT) - MIs GEEPEE: Leasing of berth for bulk & beak Bulk
Cargo handling.
> KPT-Essar Oil: Erection of SBM for handling Crude Oil & Products.
> KPT-IFFCO: Leasing of berth for handling fertilizer & raw material.
> Tuticorin Port - Port of Singapore: Licencing berth for container handling.
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> Chennai Port-Bengal Tiger Lines: Berth Reservation scheme for container
handling.
> Cochin Port Trust (C0PT)-FACT: Leasing of berth for handling fertiliser &
raw material.
> New Mangalore Port- Mangalore Refineries Limited: Setting up of crude oil
jetty (under construction).
> CoPT-P&O: Joint venture for setting up international transhipment terminal
(under evaluation).
Most of these projects have paid rich dividends to both the port and its strategic
partner.
FUTURE PLANS
Corporat isat ion
The singular most significant step taken by the government is towards
"Corporatisation" of the Ports. This involves carrying out two specific
amendments in the Major Port Trusts Act, 1963, viz., an enabling provision will
have to be introduced to denotify the Major Ports slated for Corporatisation from
the ambit of MPT Act, 1963 and the Union Government will have to introduce
amendments to Section 29 of MPT Act to facilitate the transfer of assets and
liabilities of Central Government from the Port Trust Board to the new corporate
entity. This amendment is aimed at giving legal sanctity to the transfer of assets
and liabilities of the Union Government back from the Board of Trustees to the
new company. February 1st 2001 will be remembered as a red-letter day in the
history of Port with the inauguration of Ennore Port-the first corporate port in
India. Corporatisation of the Jawaharlal Nehur Port (Navi Mumbai), New
Mangalore, Mormugao and Tuticorin Ports will be taken up in subsequent phases.
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Commercialisation
Historically worldwide success has come to ports that function as a private
enterprise or an autonomous government operated commercial style business
without political intervention. Some of the key issues that need to be addressed to
in this case are:
> Approach must be profitability oriented.
> Reorganisation of management & board for commercial operation.
> Reduce labour to workable level.
> Management training to learn how to operate a commercial enterprise.
> Evolve effective marketing strategy and develop business plan.
> Identify privatizable operations for efficiency.
> Develop a more commercially friendly pricing system.
Presently, studies are being conducted to evaluate the commercialisation
potentials of the Ports at Chennai & Mumbai. It is felt that much of the ills of the
present performance of the Ports can be cured if the ports focus towards
commercialising their operation instead of being a procedure ridden bureaucratic
set up. To operate a port as a commercial enterprise, a policy setting Board must
be comprised of persons who are commercially sound (bankers, engineers,
business managers, entrepreneurs, etc.) and this Board must be given full
functional autonomy.
Some of the suggested models for commercialisation for Indian ports are:
A. Spin off of select units (SO)
Selected non-core business units or social services of a port are sold or
contracted to private enterprise. This can include pilotage, tug operations, run
hospitals, etc.
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B. Build-Operate-Transfer (BOT)
Port allows a private company to construct and operate an enterprise on
port property. E.g. P.O. Terminal at JNPT, LNG facilities at Ennore Port, Pir Pau
Chemical berth at Mumbai Port.
C. Joint Venture (JV)
Contract where the port supplies existing facilities to a private operator and
the two share the profit or loss produced by the operator. Joint Venture have been
used where facilities are in place and mostly depreciated. The first project to
come under this scheme will be the Vallarpadam International Container Terminal
- J.V. between Cochin Port & P&O Ports.
D. Operating Concession (OC)
Port leases small unit to operate for a short period. This can be done in
cases where there are surplus storage facilities, for Container Freight Stations, etc.
Privatisation so far
So far 15 projects involving an investment of Rs. 4,376 crores and resulting
in capacity enhancement by 60.30 million tonnes have been approved by the
Government and are in different stages of implementation. In 9 cases, involving
an investment of Rs. 3,500 crores and capacity augmentation of 35.50 million
tonnes, bids are either under process or are likely to be invited shortly. In all, 24
projects involving and investment of Rs. 7, 876 crores and capacity addition of
95.20 million tonnes are on the anvil. Ennore Port, inaugurated on 1st February
2001 becomes the first corporatised Major Port in India. Another trends setting
project that of the Vallarpadam International Container Transhipment Terminal
the first Joint sector venture between a Major Port (Cochin Port) and a private
operator (P & 0 Ports), is nearing the final stages of approval by the Government.
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Privatisation of Tuticorin port
On the privatisation front the port handed over VIIth Berth to private
company MIs PSA SICAL Terminals limited on BOT Basis for the lease period of
30 years. PSA corporation, known as port of Singapore Authority till it was
corporatised in 1997, is one of the major foreign participants. The company has a
lot of international experience and has been the sole operation of the container
terminal at Singapore. It started its Tuticorin port operations in 3 rd December
1999, with the development and maintenance of the Container Terminal on a BOT
Basis. The PSA SICAL Company is the second Major Port project in India.
PSA Tuticorin container Terminal has the most modern equipment and
operating systems to deliver fast, flexible and reliable services to meet the
shipping industries needs and requirements. By calling at Tuticorin container
Terminal, shipping lines and shippers can also enjoy the high quality and value
added services that they have come to expect at PSA's terminals in Singapore and
world wide.
The company's main aim is
> Improve container handling facilities for India's southern region.
) Facilitate the development of India's growing trade market by providing
efficient, flexible and reliable terminal service.
> Help to promote smooth flow of trade in the region by meeting the shipping
and maritime industry's needs.
Modern Equipment & Comprehensive facilities provided in Tuticorin port
PSA SICALs Terminals Ltd has installed most modern equipments and
comprehensive facilities provided in the Tuticorin port. The following are the
facilities available in Tuticorin port.
> 2 ship - to shore quay cranes with 44m outreach to handle gearless vessels.