Tariff Policy and Sustainable PPPs
in the Port Sector – Case Study of
the Container Terminal Sector
Presentation To The Tariff Commission
by
Indian Private Ports & Terminals Association
(IPPTA)
September 12, 2007
Although this presentation discusses the
case study of the container terminal sector,
the basic principles vis-à-vis alternatives
suggested by IPPTA in the area of tariff
fixation and bidding model can also be
applied to the bulk cargo terminal operators
The Context
•
95% of existing trade is through Sea Ports
•
Growth of trade-intensive manufacturing will be facilitated only if terminals within Ports function
efficiently, productively and profitably
•
Indian Ports are predominantly ‘origin-destination’ Ports; they will therefore, require state-of-theart equipment, know-how and technology, to enhance competitiveness of the manufacturing
sector
•
Healthy Ports will require healthy and sustained investors who will continue to reinvest their
earnings in augmenting efficiency and productivity of terminals
•
According to Committee on Infrastructure:
•
Containerized cargo is expected to grow at 15.5% per annum every year
•
Trade handled by Indian ports is estimated to reach 877 million by 2011-12
•
Investment required to handle such traffic: US$ 13.5 billion in major ports and US$ 4.5
billion for minor ports, under National Maritime Development Programme
•
64% of the proposed investment under NMDP expected to be sourced from Private Sector
This Presentation…
•
Discusses IPPTA’s understanding on the Strategic Role of Tariff in the
Port Sector
•
Showcases the benefits of privatization in the port sector
•
Explains Features and Impacts of the existing Bidding Process and Tariff
Model
•
Expounds the deleterious macroeconomic impact of existing tariff
framework applicable to terminal operators on Indian trade
•
Sheds light on the alternatives that IPPTA has already put forward to the
Ministry of Shipping and Planning Commission towards redressing
problems of existing and prospective terminal operators in the Indian port
sector
Benefits of Privatization in spite of
Miniscule Contribution to Total Logistic
Costs
Growing Strategic importance of Private
Terminals
 During 1995-96, the entire container terminal traffic of India
was being handled by Ports
 ‘Public-Private-Partnership’ in Port Sector induced private
participation
 Post 2000, private operators due to state-of-the-art
technology and their investments started increasing their
share in total container traffic handled by their respective
ports
 According to IPPTA estimates by the end of 2006, out of 7
million TEUs of container throughput, an estimated 5 million
or 71% of the container throughput was being handled by
private container terminal operators
6
Privatization has enhanced connectivity
FELIXTOWE
NEW YORK
HAMBURG
ROTTERDAM
ANTWERP
NORFOLK
LOS ANGELES
QUINGDAO
DAMIETTA
ALEXANDRIA
PORTSAID
CHARLESTON
JEBEL ALI
JEDDAH
SALALAH
KINGSTON
SUDAN
HODEIDAH
SUDAN
DJIBOUTI
Dar-Es-Salam
Mombasaa
KARACHI
KANDLA
MUMBAI / JNPT
YEDAN
PINANG
COCHIN
TUTICORIN
COLOMBO
SHANGHA
NINGBAO
XIAMEN
CHI WAN
KUANTAN
PORT KLANG
SINGAPOR
Container Handling Charges account for
miniscule share of Total Logistic Costs
Total Logistics cost involved in moving a 20' laden container from an ICD
to US East Coast (Typical Example)
70%
60%
58%
Cost
50%
40%
30%
20%
15%
15%
10%
5%
2.50%
0%
Ocean Freight
Logistics
Destination Delivery Charges
Other surcharges during road and ocean transportation
Road Transport
Container Handling Charges at the Port
Suez Surcharge
Stuffing and other CHA Charges
2.50%
2%
Benefits derived from Privatization exceed
contribution to logistics cost-basket
JNPT
Year
Number of vessels
called
1994-95
388
1995-96
356
1200
1996-97
410
1000
1997-98
422
800
1998-99
654
600
1999-00
676
10
400
2000-01
561
5
200
2001-02
704
0
0
2002-03
708
2003-04
891
2004-05
795
2005-06
959
45
40
1600
Gross Berth Productivity
TEUs handled per vessel
35
30
1400
25
20
15
1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200495
96
97
98
99
00
01
02
03
04
05
The Strategic Role of Tariff
The Strategic Role of Tariff in the Port Sector
SUPER STRUCTURE
Magnitude of after tax
cash flows = Just and fair
returns to Port operators
Tariff
BASE
Long Term Objectives of any Tariff Model
According to IPPTA any
tariff model in the long run
must
•Ensure a sustained supply of
services to trade by providing
a healthy investment climate
to service suppliers
•Encourage Competitiveness
•Provide a climate for creation
of additional capacity which
can fuel growth
And Not
Make current PPP-investments
unviable and future
investments unattractive
Efforts of IPPTA till date to ensure this
long term goal
•
Presentation before the Ministry of Shipping with a focus
on:
o Problems associated with the existing Tariff Policy;
and
o Alternative Tariff Framework based on a ‘Floor and
Ceiling’ approach that would ensure efficient and
sustained supply curve of terminal operating
services
•
Presentation and submission of a paper to the Planning
Commission articulating the alternative bidding model that
could be made applicable to future bids in the sector
Features and Impacts of Existing Bidding
Process and Tariff Model
Existing Bidding Process: Features & Impact
•
Has created a dis-connect between the Bidding Process and Tariff Setting Principle
•
Private Operator offering the highest revenue share/royalty gets to operate the terminal
•
Private Operators keen on getting their foot into the Indian port sector due to growing
importance of trade in India’s and region’s growth have been forced into a ‘OpportunityRisk’ evaluation as against ‘Project-Viability’ evaluation
•
Private Operators are investing with the belief that best practices can be instituted
within the system by participating in it rather than staying outside
•
High revenue share/royalty figures continue being quoted as Port Trusts compete
amongst each other on creating better benchmarks vis-à-vis royalty/revenue share
price quotes
•
Bidding process has become a process to extract rents and completely neglects
concerns of trade
•
Port Trusts have become pure profit generators and have abdicated their role as trade
facilitator
Existing Tariff Model: Features & Impact
•
Cost plus approach excludes certain cost increases (e.g. inflationary
adjustments are being restricted to WPI vis-à-vis fuel, labour)
•
Terminals not allowed to charge tariffs that are driven by ‘market forces’
Tariff
Regime
Does not cover all recurring
costs
Places a cap on rate of return
Result
Rewards inefficient operators and encourages over-investment and
underutilization
Denies efficient terminal operators the opportunity to generate
investible resources
Compresses the supply curve
Existing Tariff Model: Flawed By Design
1
Excludes
some costs
from total
costs
5
Rising costs
include
royalty to
Ports
2
Caps the
permissible
return on
capital
3
Writes down
value of assets
employed
4
Generates
tariffs that
systematically
decline even
as costs rise
6
7
8
Terminal
operator
uses capital
to cover
rising costs
Elimination of
terminal operator
from ‘market’
sooner than later
Capacity gets
curtailed and
competition
diminished;
This defeats the
purpose of PPP;
Cost to Trade
increases
Impending Macroeconomic Disaster as a
result of existing Tariff Model
Shrinking Capacities – An Example
•
Tuticorin Container Terminal: PSA SICAL
•
Started Operations on December 21, 1999
•
Improved Efficiency and Productivity
•
•
•
•
•
High Vessel and Crane Productivity: VR 230% (from 15 to 50 moves/hour); GCR 180% (from
10 to 28 moves/hour
Quick turnaround of Vessels, Trucks and Containers: Vessel Port Stay 80% (from 2 days to
12 hrs)
Integrated Services
Use of Advanced IT Systems
Reduction in dependency of liners on Colombo as a trans-shipment hub
•
Tariff Order of September 2006 fixed tariff at Rs. 980/TEU against industry norm of Rs.
2500 per/TEU
•
Tariff fixed does not reward efficiency as well as productivity achieved
•
PSA SICAL was forced to seek the intervention of the Chennai High Court
•
High Court in its order in August 2007 has asked the Hon. Ministry and TAMP to give
PSA SICAL a personal hearing and pass orders on merit
Simulating Disaster: Nhava Sheva
International Container Terminal (NSICT)
•
MGT of NSICT = 0.6 million TEU
•
At present traffic handled = 1.32 million TEU
•
Value of the goods handled @ US$ 10,0001 per TEU = US$ 13.2 billion
•
Assuming that NSCT decides to operate at MGT:
•
Estimated loss of direct and indirect employment = 6,000
•
Total value of trade that will suffer = US$ 6.6 billion
•
Loss to the Port at present royalty = Rs. (1.32-0.60) X 1150 million = Rs. 828 million
•
Liners will continue to charge a peak season tariff surcharge of US$ 100 per TEU
based on demand and supply
1
Industry estimate
Solutions Provided by IPPTA vis-à-vis
Tariff Model – Applicable to Existing
Container Terminal Operators
IPPTA’s Suggestion – A ‘Floor’ and
‘Ceiling’ Model
Ceiling
Highest tariff that an
operator shall charge
Protects the users
The ceiling and floor enable
terminals and their
customers to work within a
range of competitive and
feasible tariff plans
Floor
Lowest tariff that an
operator may charge
Facilitates sustained
supply of quality service
Three Guiding Principles
Tariff-setting model must protect users the export and import trade – and
investors
Businesses must be able to recover
costs and get viable returns on capital
Tariffs must trigger competitiveness and
increased supply
The Six Elements of the Proposed Tariff
Framework
 Normative capacity
 Actual volume
 Operating and administration costs
 Royalty at minimum guaranteed throughput
 Gross assets deployed
 16% return on gross assets deployed
Normative Capacity: Example in the Case
of Container Terminals
Normative Capacity = 113,100 TEU per
crane
Source: Report by National Working Group on Normative Cost based Tariff for Container Related Charges, July 2005
Minimum Guaranteed Container Volume:
The Significance
Minimum guaranteed container volume or throughput
is annual level of cargo guaranteed by the terminal
operator while signing the concession agreement
Royalty at Minimum Guaranteed
Throughput: Why?
 Since minimum guaranteed cargo or throughput is a
committed throughput, the royalty payable on this
throughput is a guaranteed cost that the terminal
operator has to incur each year to be in the
business of providing quality services to users
 Royalty, thus incurred, is not a capital expenditure
as:
 it is incurred with annual periodicity; and
 it does not augment available capacity
Royalty for Tariff Fixation and Payment to
Ports: The Scenarios
Actual volumes are
lower than minimum
guaranteed throughput
Royalty would be a 100% pass-through
up to the maximum of (1) the minimum
guaranteed royalty for tariff fixation and
(2) what is payable to the port,
provided the latter is payable on account
of non-achievement of volumes
Actual volumes are
higher than minimum
guaranteed throughput
but are below normative
capacity
To the extent of the difference in
minimum guaranteed royalty and royalty
on actual volume, royalty will not be
payable to the port and will also not be a
pass-through
When there is no
committed or minimum
guaranteed throughput
Royalty payable to the port and royalty
pass-through will be at actual
Ports’ Share of Excellence
Slab One: If the actual volume exceeds
normative capacity in a range of 1% to 15%
then the terminal operator shall pay a royalty
worth 15% of the royalty/TEU, which it pays on
guaranteed volumes, on the excess (excess =
actual volume – normative capacity)
Actual
volumes
are higher
than
normative
capacity
Payment
to port
Slab Two: If the actual volume exceeds
normative capacity in a range of 16% to 30%
then the terminal operator shall pay a royalty
worth 10% of the royalty/TEU, which it pays on
guaranteed volumes, on the excess
Payment
to port
Slab Three: If the actual volume exceeds
normative capacity by more than 31% then the
terminal operator shall pay a royalty worth 5%
of the royalty/TEU it pays on guaranteed
volumes, on the excess
Payment
to port
Ports can directly subsidize trade
Ports can exhaust their right to subsidize trade
directly, in stead of penalizing the terminal operator, if
they believe that tariffs are high
30
Royalty, Payment to Ports and Trade
Merit 1
Merit 2
Merit 3
The royalty pass-through at the minimum
guaranteed throughput respects the spirit and letter
of public-private-partnership
Trade does not bear the cost of lower throughput
when the actual volume is between minimum
guaranteed throughput and normative capacity
With the proposed slab rates operative, when actual
volumes exceed normative capacity, terminal
operators’ share gains from higher throughput with
ports and trade
Extreme, Adverse Case
 When a terminal functions below 60% of its
normative capacity then its actual volumes will be
used for determining its tariff
 This will imply that such a terminal will effectively
have only one tariff
 A floor or a ceiling will not exist for such a terminal
Floor is
Operating and
administration costs
including
depreciation at actual
volumes
+
Royalty at minimum
guaranteed
throughput under
concession
agreement
+
Return on gross
assets deployed
----------------------------------------------------------100% of normative capacity
Ceiling is
Operating and
administration costs
including
depreciation at actual
volumes
+
Royalty at minimum
guaranteed
throughput under
concession
agreement
+
Return on gross
assets deployed
----------------------------------------------------------60% of normative capacity
Operational Outcomes of Tariff Band: A
Virtuous Circle of Stability, Reliability and
Competitiveness
Four
One
Greater stability in tariffs since the
increase or reduction will be
gradual
Asset utilization will rise; India’s
aggregate competitiveness will
rise
Floor and
ceiling
Two
Enables the better
management of traffic;
smoothens the utilization of
resources
Three
Thereby, it will raise the overall
availability and reliability of
service
Utilizing the Bidding Framework to Rectify
Anomalies in Tariff Model – Applicable to
Future Bidders
Basic Model of the Bid
Royalty/Revenue Share to be paid by the
Operator over the life of the Concession Period
shall be made public before inviting Bids
Operators shall be asked to submit Bids
based on tariffs
Operator quoting the lowest tariff
throughout the life of the Concession
Period wins the Bid
Mandatory Information that must be disclosed with
royalty/revenue share in the Bid Document

Outline the quantum and quality of the civil and port
infrastructure, which the Port would be handing over to the
Operator

Normative Capacity of the Terminal and Norms utilized to
arrive at Normative Capacity

Services the Port shall provide to the Operator and the
charges thereof

Volumes expected to be handled by the Operator for the
first five years

Incorporation of a non-compete clause
Royalty expectation by Port and Norms
Terminal Operators should only be charged either royalty as a
% of net revenue or a lease rent or an upfront fee and not a
combination resulting from any of these three elements
Royalty rate up to 5%
if the Operator is only handed a water body and is
expected to create a terminal on the same to handle
prescribed normative capacity
Royalty rate bet. 5.1% –
7.5%
if the Operator is provided with land, which is
completely under developed (e.g. barren land) and
he is expected to transform it into a full-fledged
terminal with the prescribed normative capacity
Royalty rate bet. 7.6% –
10%
if the Operator is provided with semideveloped/developed land with certain limited
amenities such as a water connection, power
connection, a semi-finished road connecting the
terminal to the Port entrance et al
Royalty rate of 15%
if the Operator is being handed over a full fledged
terminal
Definition of Consolidated Tariff and Tariff Norms
Consolidated Tariff = charges incurred towards movement of
origin & destination (O&D) containers
from ship to yard and yard to ship
+
charges incurred towards movement
O&D containers from terminal yard to
railway depot (in case of rail boxes) and
vice versa
+
charges incurred towards movement
O&D containers from yard to trucks and
vice versa.
Transshipment containers are
excluded from this definition
Specific Tariff Norms have also been
conceptualized by IPPTA
Bid Evaluation Basis

Bidders will quote consolidated base tariffs for the first five
years based on their subjective estimations of tariff

Bids will have to be evaluated only on the basis of the
volumes-expectations figures made public before the bid

Operator with the lowest weighted average consolidated
tariff per TEU for the first five years will be awarded the
Terminal
Tariff Adjustment Factor
Adjustment Factor
=
15/100 + 15/100 X (L1/L0)
10/100 X (E1/E0)
+ 15/100 X (F1/F0) +
+ 45/100 X (WP1/WP0)
L1 = All India average consumer price index for industrial
workers on the date of Adjustment
LO = All India average consumer price index for industrial
workers on the base date
F1 = Whole sale price index for fuel on the date of
Adjustment
Share of factors of production (excluding
royalty) in the cost structure of the Operator
•Labour Cost – 15%
F0 = Whole sale price index for fuel on the base date
•Fuel Cost – 15%
EI = Whole sale price index for electricity on the date of
Adjustment
•Electricity cost – 10%
E0 = Whole sale price index for electricity on the base date
WPI1 = Whole sale price index on the date of Adjustment
WPI 0 = Whole sale price index on the base date
•Other Expenses – 45%
Use of Tariff Adjustment Factor
Tn = Tn-1 x Adjustment Factor
The Operator will be allowed to increase the tariff throughout
the life of the concession period by using this Tariff Adjustment
Factor
Benefits of IPPTA’s Model

Reduces information asymmetry within the bidding model;

Provides the right climate for creating capacities thereby benefiting trade

Tries to make the Bid model ‘pure’ tariff based.

Benefits the Trade with the lowest tariff and with a transparent mechanism of
how the tariff will scale during the life of the concession period.

Compels the Operator to internalize, future efficiency gains, traffic risk, and
most importantly the impact of royalty, while quoting tariff figures.

Creates a competitive obligation on the Operator to bring in the best equipment
to serve trade efficiently.

Does not compel the Operator to introduce equipment to generate idle
capacities.

Allows the Operator retain efficiency gains.

Reduces un-necessary regulatory interference
THANK YOU