Why the ports sector is India’s infrastructure laggard

Context

The Planning Commission cut its investment projections for almost all infrastructure sectors in a March 2010 mid-term review of its five-year targets. This was hardly surprising given continued policy ambiguity, difficulties in obtaining bureaucratic clearances and in acquiring land, resistance from incumbents to hand over control of construction and operation of projects and – by the government’s own admission – the inadequate and inefficient rollout of projects. We highlighted many of these problems in our detailed 2008 report India Infrastructure: Playing Catch Up. More surprising, however, was that the ports sector suffered by far the largest downward revision – 53 per cent – in the Planning Commission’s infrastructure investment forecasts.

Source: Planning Commission.

The ports sector had been expected to be one of the better performers in the infrastructure investment stakes following changes to regulations for investment in ports introduced in 2008 and designed to attract more private investment in the sector. This note examines why these efforts have not had the desired effect and assesses future prospects for port investing.

The economic importance of improved seaport capacity …

Because India is dependent upon a wide variety of imports – including fuel (70 per cent of domestic oil needs are met through imports) and food (India is the world’s largest importer of edible oils and pulses) – it needs far greater port capacity and efficiency to cater to fast-growing demand in a rapidly expanding economy. Sustaining real annual GDP growth rates of 7-8 per cent will also require overall expansion of the country’s external trade beyond its present global share of a mere 1.6 per cent. The problem of existing capacity is not limited to there not being enough of it. In addition, various operational shortcomings at Indian ports limit trade flows and raise the total cost of shipments. These problems include congestion, the inability of most ports to receive large enough vessels to achieve economies of scale, and inefficient processes for offloading cargo. The average turnaround time for a cargo ship at an Indian port is 3.85 days compared with around 10 hours at Hong Kong, and Indian ports have been unable to improve this performance over the past few years.

… underlies over-ambitious investment targets

The Indian government is well aware that it needs to expand port capacity, and that in order to do so it must attract private investment. The targets it set for port development – as for other infrastructure sectors – are ambitious. Shipping Minister G.K. Vasan has said he wants to build a port every 150 km along the country’s 7,500 km coastline, and increase the annual capacity of major ports (ports run by the central government that handle around three-quarters of all traffic) to 825 million tonnes by FY12 from 599 million tonnes in March 2012. When the Planning Commission initially established its investment targets for the 2007-12 planning period, it aimed to increase India’s total port capacity (including in minor ports that are controlled by state governments or private developers) to 1.5 billion tonnes by FY12 from 840 million tonnes currently. Capacity expansion includes upgrading cargo handling facilities and adding more berths.

Bureaucratic, regulatory and structural obstacles to port expansion

From the perspective of the situation on the ground, these targets and assumptions were highly unrealistic from their conception. A Ministry of Shipping official was quoted in May 2010 to the effect that the main reason for the slippage in targets is delays in awarding contracts at various ports. Of the 276 projects scheduled by the 2005 National Maritime Development Programme for modernizing and upgrading major ports by FY12, only 50 have been completed so far while 74 are under way. Of the rest, 25 have been dropped while the bulk of the planned projects have not even progressed as far as contracts being awarded.

In addition to bureaucratic delays in awarding contracts, developers have faced challenges in executing projects due to difficulties in acquiring land, lack of connectivity and controversial regulations that in some cases have led to litigation. As we recently described in our June 2010 report Reforming India’s land market to accelerate industrial and infrastructure development, land acquisition is the most important brake on India’s industrial and infrastructure development. A DP World project to build a 1–3 million teu international container transhipment terminal at Cochin Port in Kerala was delayed for months because of the complexity of dealing with 261 families who occupied just 4.3 hectares of land that was needed for an associated railway line. The issue was finally resolved through a generous rehabilitation and resettlement policy, and the terminal is due to open by November 2010.

The Ministry of Shipping has recently taken steps to iron out a few problems, most notably in March 2010 when it removed a cap on the number of applicants allowed to make financial bids for developing cargo-handling projects at the major ports. Applicants who were not among the six bidders short-listed at the Request for Quotation (RFQ) stage filed court cases, in turn delaying the finalization of many contracts. A well-informed newspaper commentator (P. Manoj writing in Mint newspaper in March 2010) concluded that this six-bidder experiment had caused a three-year delay in plans to boost port capacity.

Other thorny issues include a draft policy released by the Ministry earlier in 2010 that aims to block a private terminal operator from bidding for two adjacent berths within one port for handling the same type of cargo or from bidding for another terminal within a 100 km radius of one that it already operates. The government wants to limit the overall capacity and the number of terminals one developer can build at a single port in order to prevent the emergence of private monopolies in cargo handling since more than half the cargo in India’s ports is managed by two container port operators: Gateway Terminals India (a 50:50 joint venture between Container Corporation of India and the port division of the AP Moller-Maersk Group) and DP World of Dubai.

Government efforts to enforce these measures caused work on two projects worth more than Rs70 billion (US$1.5 billion) to stall in late 2009. APM Terminals (Maersk) filed a case against the Jawaharlal Nehru Port Trust (JNPT) in Mumbai as it was prevented from bidding for a further container terminal after winning a contract worth Rs6 billion (US$128 million) for developing another container handling facility at that port. In addition, PSA Sical took legal action against Tuticorin Port Trust in Tamil Nadu state on the grounds that a prior agreement established the company’s eligibility for bidding for future tenders floated by the port.

Clearly, the government’s port policy is still in a state of flux, with these new changes coming soon after the government revamped investment rules under the Model Concession Agreement (MCA) in 2008. The Tariff Authority of Major Ports (TAMP), the independent tariff regulator, also revised guidelines in 2008 for new public-private partnership (PPP) projects to index tariffs to inflation. These changes have yet to produce the desired effect of increasing investment in ports. At least part of the reason is that despite these attempts at improvement, the regulatory environment remains unsatisfactory in various respects.

Apart from the contentious RFQ stipulation and the monopoly clause still under review, the MCA does not differentiate between the various types of terminals – dry bulk, liquid bulk and container – and as a result bidders must seek clarification on specific issues regarding each project, which in turn delays the selection process. The TAMP is also far from perfect; despite the above-mentioned indexing of tariffs to inflation, it sets an upper limit to the tariffs for bulk and container terminals based on estimates for capital spending on a project which could potentially yield lower returns for developers in the (always plausible) event of cost overruns.

Another government proposal to incorporate major ports as joint stock companies has taken more than a decade to come to fruition due to opposition from unions and dissenting lawmakers. As at 31 March 2009 major ports handled 530.5 million tonnes of cargo, or 72 per cent of the total shipments, while minor ports managed 208 million tonnes.

Source: TS Research.

Of the 13 major ports (the government in June 2010 declared Port Blair a major port), the Ennore port in Tamil Nadu is the only one that has been operating as a state-owned company for several years now (and, as shown in Table 3 below, is among the most efficient of the country’s major ports). The others are operated by trusts that comprise representatives from various groups including the central and state governments, shipping lines, railways and labour unions.

Plans are now afoot to convert JNPT into a company in 2010 along with one other port that remains to be decided. However, legislation is yet to be passed in parliament to amend the Major Ports Trust Act. Corporatization will force the ports to focus on improving revenue and profits, increasing operational efficiency and raising funds from market sources as well as providing them with more autonomy from the central government.

A case study: Kolkata Port

The range of issues obstructing port sector development is much in evidence in the Kolkata Port Trust (KoPT) which handles both the Kolkata and Haldia ports. During our recent visit to Kolkata, M.L. Meena, who took over as the Chairman of KoPT in late June, shared with us his view of the main problems. No private project has been undertaken for the last four to five years despite interest expressed by private investors because the port authority itself has in recent years not encouraged private development. The Chairman’s post had been vacant for the past year. As a result, both the Kolkata and Haldia ports remain highly inefficient even though KoPT is India’s third-largest major port for handling container traffic and the second-largest for importing coking coal. The average turnaround time in Kolkata port of 4.6 days in FY09 was one of the highest among the 12 major ports.

Source: Ministry of Shipping.

Port users in Kolkata complain of excessive congestion and cumbersome procedures for clearing cargo that in turn increase their trading costs. For a six-month period starting in October 2009 shipping lines imposed a congestion charge of over US$200 per container for traffic to KoPT. Users had no option but to pay in view of the limited options around the region. Meanwhile, lack of dredging has resulted in declining draught at Haldia, making it impossible for larger ships to enter the port.

Several projects have been drawn up to modernize and upgrade the Kolkata port area, including building a new deep sea port at Sagar with a draught of 10 m (which could be deepened to 12 m with dredging – much deeper than the two existing ports), which would increase KoPT’s total annual capacity to 64 million tonnes/year (more than the combined existing traffic at the other two ports). The development of Sagar had first been planned in 2002; when KoPT finally sought expressions of private interest in the project in 2009 it received 15 applications from companies including Essar Shipping, Mundra Port and SEZ, Sical Logistics, Punj Lloyd, Concor and Gammon Infrastructure. However, no further developments have taken place.

The new KoPT Chairman is now planning to revive the Sagar project along with developing a container terminal at nearby Diamond Harbour and extending the Haldia Dock Complex at Salukhali. However, connectivity to the Sagar project will also need to be developed, including building a bridge to connect Sagar island with the mainland and subsequently laying rail lines. Similarly, rail connectivity to the proposed Diamond Harbour container terminal project that has been on hold for the past two years needs to be improved. The Railways Minister in the current Congress-led government, Mamata Banerjee, who hails from the state of West Bengal where these ports are located, has announced plans to improve port connectivity in the state.

While this combination of new top management drive and central government support could improve matters at KoPT, the story of inertia in recent years remains typical of the ports sector as a whole.

Better policies in minor ports

Our call in 2008 in our detailed infrastructure report India Infrastructure: Playing Catch-up that private investment opportunities in minor ports are superior to anything on offer at major ports still holds. Capacity addition in minor ports has been faster due to greater clarity in many state government policies as well as the freedom the developers have to set market-determined rates for their services because the TAMP does not apply to minor ports. The Indian Express newspaper on 30 December 2009 reported that while 12 major ports added 80 million tonnes of capacity between 2007 and 2009, Gujarat state alone increased capacity by 53 million tonnes in the same period while the southern state of Andhra Pradesh added 50 million tonnes in four minor ports.

In contrast to the unsatisfactory and uncertain regulatory environment for major ports, policies on minor ports adopted by state governments such as Gujarat, Maharashtra and Andhra Pradesh are relatively clear-cut. Gujarat, which is home to 20 functioning minor ports and one major port (Kandla), explicitly states in its maritime policy that it will provide operational autonomy to private developers through its BOOT (build-own-operate-transfer) framework. Maharashtra gives private investors the freedom to fix tariffs under a BOOST (build-own-operate-service-transfer) model with state government equity participation limited to 11 per cent.

However, the development of these ports is also running behind targets due mainly to the lack of proper connectivity via both rail and road linkages (see our January 2008 note Growth derailed). This is particularly important for greenfield ports, which mostly happen to be private ports. Such ports need to attract customers from existing ports and typically also charge higher rates for their services to defray the large capital costs of building a brand new port. A December 2009 report by the Department of Economic Affairs inside the Finance Ministry stated that better coordination between road, rail and port authorities is “badly needed” in order to avoid any negative effects on private investment, which has been estimated to account for around three-quarters of total investment in ports during the 2007-12 planning period.

Costs to develop the new Dhamra port being constructed jointly by Tata Steel and Larsen & Toubro in the eastern state of Orissa escalated by 30 per cent to Rs32 billion (US$683 million) mainly because the port ventured to improve rail connectivity by building a four-line rail link instead of the double line that was initially planned. The higher investment cost could eventually reap benefits as the port has assured demand for cargo from co-developer Tata Steel, which has its main plant in West Bengal and is planning to set up another 6 million tonne steel mill in Orissa. The Dhamra port is located in the mineral belt of eastern India with the potential to serve companies in Jharkhand, Chhattisgarh, West Bengal and Orissa. A senior manager at another Orissa-based steel producer and port user shared with us his view that the deep draught at Dhamra of around 18 m will attract users away from other stagnating ports such as the KoPT.

Conclusion

The poor performance of India’s ports sector underlines the need for the government to frame more investor-friendly policies to get the necessary funds to develop better infrastructure in India. According to government estimates, only US$200 billion has been invested in the infrastructure sector in the first three years of the 2007-12 plan period compared with a target of slightly above US$500 billion for all five years. Risks emanating from bureaucratic delays in awarding projects, strong labour unions, and poor rail and road connectivity have offset the merits of investing in the ports sector. Policies, particularly for major ports, remain ambiguous and deter private investment.

Policy refinements such as the amendment to the Major Ports Trust Act that involves converting major ports into companies will be important for attracting investors, as will be improved rail connectivity for both major and minor ports. The interest generated among prospective users of the Dhamra port in Orissa shows the potential for high returns created by the development of a modern deep-sea port with good connectivity in a fast-growing economy that is plagued by capacity shortages. Although private investors are undertaking various projects in India’s port and broader infrastructure sector and are keen to continue to do so, investment remains far short of demand due to policy constraints.

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