The Maritime Agenda envisages plans for creation of port capacity of around 3200 MMT for handling the expected traffic of about 2500 MMT by 2020. However, in order to scale up this capacity, the port sector has to overcome the impediments before reaping the growth prospects.
Ports steer over 90 per cent of the India´s external trade volume every year, and are gearing up to meet the rapid cargo demand growth. The port sector is a cog in the government´s ´Make in India´ mission, and with several new power projects commencing operations, the prospects are bright. Against the backdrop of the Maritime Agenda 2020 to create a capacity of 3200 million tonne (MnT), the government´s actions to fast track the clearances, build mega ports, and fix the evacuation infrastructure challenges bode well for the growth. Nevertheless, the sector cannot rest on laurels, and has to tackle the impediments before reaping the growth prospects.
Need for capacity augmentation
The capacity at major ports and non-major ports stood at 823 MnT and 600 MnT in December 2014 respectively. India has a coastline of more than 7500 kilometres with 13 major ports (including the corporate model Kamarajar Port) and over 180 non-major ports. The combined capacity utilisation was appro¡ximately 70 per cent in FYE14. Generally, 70 per cent is the threshold for further expansion for the ports. Hence, it is imperative to undertake capital expansion at a swifter pace.
Over the years, non-major ports have gained the larger pie of the trade and are expected to garner a large share in the future. Non-major ports share jumped to 42.89 per cent (FY14) from 25.08 per cent (FY02), while major ports declined to 57.11 per cent (FY14) from 74.92 per cent (FY02). Non-major ports´ cargo volumes illustrated sustained growth, outpacing major ports again in FY14 substantially (5.8pp). Notwithstanding the competition between major and non-major ports, the government´s initiatives like investments and building new ports to steam the growth appears favourable.
Rs 258.7 billion worth of projects is in the various stages of construction that could add capacity of 276.41 MnT over FY16-17. Additionally, projects entailing an investment of Rs 72.97 billion, having potential of capacity addition of approximately 70 MnT were awarded in FY15 (as at the end of December 2014). These projects not only aim to create capacity, but also to improve the port infrastructure and connectivity.
The aforesaid projects exclude three large port projects - development of two new major ports and a satellite port near JNPT. Two major ports - Sagar in West Bengal and Dugarajapatnam in Andhra Pradesh - are on-going. Sagar port will be developed in a partnership mode between the Union Government and the state government through an SPV and is expected to be constructed at an estimated cost of over Rs 115 billion. Although the contours of Dugarajapatnam (Andhra Pradesh) and a satellite port at Wadhwan (Maharashtra) are to be finalised, all these ports could be operated under the landlord model (see Figure 3). Internationally, many successful ports, including PSA International have switched to the landlord model. The National Transport Development Policy Committee also recommends a strategic institutional shift to landlord model to create a healthy competition among the players.
Non-major ports´ capacity creation was majorly driven by the capacity utilisation statistics and tying up with long-term demand. Ports like Mundra, Dhamra and Krishnapatnam continuously aim to achieve higher capacity utilisation, and their timetable of capex is linked to the volumes.
Adequate port infrastructure to handle the increased cargo load of larger vessels and sufficient ingress and egress links are likely to influence productivity positively. Each port is a heterogeneous entity, and no two ports would be physically, financially, and economically same. Despite strong internal infrastructure, many ports struggle to garner a high market share in the absence of external infrastructure facilities. Chennai port has lost cargo to Kamarajar port due to congestion, and similarly many ports lost its sheen due to the lack of evacuation infrastructure systems. Ports with better inter-modal hinterland connectivity fared better than large ports encountering chronic evacuation congestion. A few ports commenced operations sans rail connectivity, impairing the cargo volumes ramp-up. However, the rail connectivity was subsequently being built under the public private participative model. For example, Mundra commenced its operations without a rail infrastructure. Subsequent to the construction of rails, it has become the numero uno in handling cargo in the country. Despite the availability of rail connectivity between the mouths of the coal mine and the power plants, many companies prefer coastal movements given lower trans¡portation cost. Hence, rail connectivity to the ports is a pre-requisite for the ports´ sustainability. Major ports partnering with Rail Vikas Nigam Ltd are likely to form a Rail Port Connectivity Company (RPCC) to fund and build evacuation infrastructure for the ports. In order to scale up cargo evacuated through rails (current evacuation is 28 per cent), RPCC will raise equity capital and funding from multi-laterals. Notwithstanding the rail connectivity, the road infrastructure serves as a nerve centre to attract cargo to the ports.
Indian ports lack the capacity to handle bigger ships as they require deeper draft levels above 15 metres. Non-major ports are generally armed with deeper drafts as opposed to major ports. India loses cargo volumes to Singapore and Colombo in the absence of deep drafts and port infrastructure to handle large vessels. Hence, capacity additions and profitability of shipping lines will impact the competitive position. If the draughts are deepened, India could fiercely compete and position as a transshipment hub.
The depth of the hinterland would decide the ability of the port to tide over the business cycles. While large greenfield ports tackled embargoes and mining restrictions effectively and substituted with other cargoes, smaller seaports´ limited wherewithal drained balance sheet resources. The presence of long-term customers, take-or-pay contracts and diverse cargo mix aid large ports to tide over the challenging environment. However, minor ports are grappling with spare capacity and scouting for clients to bridge the revenue shortfall against their expectations. Therefore, ideal development should focus on building industries around ports. Sagar Mala initiative is one such programme to create coastal economic regions (CER) and promote coastal shipping. CER will entail manufacturing hubs underpinned by modernised port over a length of 300 km along the coastline. The scheme also promotes coastal shipping to gradually reduce the burden on the existing mode of transport. The government aims to build 10 CERs through an SPV and create efficient evacuation systems.
India imports petroleum oil and lubricants (POL) to meet 75 per cent of the demand and non-major ports are increasingly used for POL imports. India Ratings & Research expects the economic growth to be 7.7 per cent in FY16, higher than the previous years; hence the energy demand is likely to inch up, offering immense potential for the ports. Of the overall trade, approximately 36 per cent originates from POL and 24 per cent from coal (thermal and coking) in FY14. With several coastal power plants slated to achieve operations in FY16, notwithstanding the increased production from Coal India, the imports are likely to rise steeply.
Tariff Authority for Major Ports (TAMP) through its new guidelines metamorphosed the tariff setting mechanism in January 2015 from a regulated model to a market-linked mechanism. With the change, a level-playing field is set and major ports have leeway in setting tariffs based on the average revenue requirement, reasonable return on capital employed, and tariff indexed to inflation on fulfillment of performance standards. Port trusts have to ensure that new tariff should not lead to diversion of cargo to the competing port.
Although 100 per cent foreign direct investment is allowed under automatic route, the inflows have remained minimal over FY11-FY15. The government envisages implementation of mega ports collaboratively, with a private partner under the landlord model. Additionally, the government plans to make strategic investment in international ports through Indian Ports Global (SPV). Another policy measure allowed major ports to allot their land holdings by inviting competitive bidding. Major ports own over two lakh acres of land which could be leveraged for industrial development and boosting revenues for the port.
Similar to large infrastructure projects, ports are long gestation projects entailing complex construction activity. Therefore, the ports require long-term finance that could aid in meeting timely debt service notwithstanding the economic cycle changes. At the same time, sans private players´ contribution, it would be a difficult task to achieve the 2020 target capacity. The estimated investment in ports before 2020 is Rs 2,960 billion, of which a substantial portion has to be from private players. In order to make the private investment attractive, a review of Model Concession Agreement is required. In the absence of adequate infrastructure facilities in the port, minimum guaranteed traffic clause loads demand risk on to the operator, including the payment of royalty.
Right balancing of risks between public authority and private player will create a conducive investment climate. Recent measures like 5:25 scheme, take out financing and infrastructure debt fund are note-worthy and augur well for the sector.
The sector is in a constant state of flux due to the evolving changes in the policy and the dynamic international economic environment. Given the need for higher investments, the existing PPP model could be tweaked to attract more investments. A snapshot of the trends delineates that the sector is favourably placed for strong growth. However, timely supportive policy measures are required. The government should resolve issues like building last mile connectivity, simplifying the customs procedure and deepening of draughts to accelerate the cargo growth. In short, it is critical to establish a comprehensive risk management framework before the investments are made, rather than kick the can down the lane.