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/
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