Three major container terminal operators in India have been hit by tariff reductions thereby reducing their revenue earning capability and positioning them to be loss-making units, writes SS Kulkarni.The Tariff Authority for Major Ports (TAMP) was constituted in April 1997 to provide for an independent Authority to regulate all tariffs, both vessel-related and cargo-related, and rates for lease of properties in respect of Major Port Trusts and the private operators located therein.Presently there are two sets of Tariff guidelines co-exist. The 2005 tariff setting guidelines make it unviable for container terminal operators to continue operating a sustainable business in the long run – they leave the operator with no choice but to cut their losses by reducing the amount of business handled at the terminals. The upfront tariff guidelines of 2008 for new terminals commencing operations post 2008 have established tariff based on gross assets, any deviation from that will put existing terminals on competitive disadvantage.Present port sector environmentIn 2011, ports across India handled close to 9.8 mn TEUs of container traffic. A little more than a decade ago, India’s contribution to world trade was not more than 1.6 mn TEUs. With the advent of privatisation in 1997, the container port industry has seen a 500 per cent growth supporting India’s EXIM trade growth.Presently the private sector has invested more than Rs 10,000 crore in the Indian port industry. Government believes that 64 per cent of proposed investment planned in major ports will come from the private sector and there is an investment need to $13.5 billion (Rs 60,750 crore) in the major ports in the country (as defined in the NMDP). Yet, to date over the last three years, the number of projects started is insignificant.Containerised cargo has grown at a rate of about 14 per cent per annum over the last five years. India has 12 major ports and 187 minor ports along 7,517 km long Indian coastline. Cargo handled by major ports has increased by 9.5 per cent per annum over the last three years. Major ports handle nearly 75 per cent of the total container traffic.The new Foreign Trade Policy envisages doubling of India’s share in global exports in next five years to $150 billion (Rs 675,000 crore). A large portion of the foreign trade is to be through the maritime route: 95 per cent by volume and 70 per cent by value.The Ministry of Shipping accepts the lacunas in the 2005 guidelines stating that “the existing policy has several pitfalls and aberrations/inconsistencies which require elimination”, however although guidelines expired in 2009, the same have been extended year on year for the last two years without any changes let alone improvements.Present crisisIn the last one month, the world’s three largest container terminal operators operating in India have just been hit by unjustifiable tariff reductions (44 per cent, 28 per cent and 12 per cent) thereby reducing their revenue earning capability and positioning them to be loss-making units. These tariff reductions leave the operators with no choice but to cut their losses by reducing the amount of business handled at the terminals.Impact on trade and industryIn a period, where there is ample competition, and growing demand, terminal operators are not allowed to charge tariffs driven by market forces.The combination of Terminal Handling Tariffs and Port Tariffs constitutes less than 4 per cent of the logistics costs. Yet there is a continued thrust from the government to control and over regulate the terminal operator tariffs; for a cost head that has little or no impact to the overall logistics cost.As much as 96 per cent of the logistics costs incurred by importers and exporters in India remain unregulated. Further, there exists a significant upward revision to the THC the shipping lines charge the importers and exporter versus the THC the shipping lines pay the port/private operator, ie, shipping lines are making profits on the THC; and this completes defeats the whole objective behind why TAMP came into existence as well as the tariff setting guidelines exercise.Lack of attractiveness of India as an investment destination in the long run: Reduced FDI into the country for port and logistics related infrastructure as foreign investors apart from looking for reasonable returns on capital employed also pay a lot of attention to stability of government, sector policy, consistency in regulation and a level playing field amongst competitors, etc. Most importantly they look at the ability to revise/modify policy guidelines through an addressal system with the government especially when investing in projects over a large timeline of 20-30 years, as market dynamics and environment in which they operate would change, that the govt policy should allow for suitable modifications to be made to cater to those changes adequately.A combination of shortage in available port capacity and an unavoidable decision by affected terminal operators to cut back volume will result in India going back into pre-liberalisation era and slow the India growth engine.IPPTA’s recommendationsTo develop formulae for determining standard capacity of different facilities (both sea and landward) at a port/terminal and suggest the standards for different variables to be considered in computation of the standard capacity. In this regards, the methodology prescribed in the upfront tariff guidelines of 2008 may be taken note of.IPPTA has drafted a new set of guidelines based on the normative approach of the 2008 guidelines but with certain changes based on international norms/practices.To analyse individual activities and service groups and develop physical norms for efficient operation of facilities:In majority of the concessionaire agreements the physical norms have been specified. Various terminals are in the different stages of operation depending upon the year of commencement of operation, using a variety of equipment.The operating norms should be dealt by the operator and his customer (the shipping line).To determine the normative cost, both fixed and variable, of different operations with reference to the physical norms developed and provide suitable method for periodic updating of costs:The variable costs should be calculated per unit basis for the total normative/optimal capacity and the fixed cost as a percentage of the gross fixed asset plus the working capital.The updating of costs should be to the extent of 75 per cent of the CPI (IW) for all commodities announced by the Government of India occurring every relevant year which will be a fair reflection of the inflation.To suggest suitable method for recognising capital cost relevant for achieving the standard capacity and allowing return thereon:For existing terminals, where costs are known/already incurred - the actual cost as per the books of accounts based on gross asset concept proposed in the normative approach should be taken into consideration.For any future replacement and upgradation of equipment - costs based on the quotations received by the operator should be considered.To examine the issue relating to pass-through of royalty/revenue share payable by the qualifying private terminal operators and suggest the method of factoring admissible pass-through in the normative model:For cases prior to 2003, 100 per cent allowance of royalty as cost should be permitted. For cases post 2003, a reasonable portion of royalty paid for certain infrastructure provided by the Port Trust like roads etc, should be recognised. We suggest that 20 per cent of the revenue share (approx 50 per cent of the average revenue share offered by various terminals concerned) should be considered as cost.Licence Agreement Review Mechanism to be set up: MoS to consider and amend the existing licence agreements with the private port operators to make necessary amendments to ensure that the pioneer port operators are not disadvantaged due to “changing goals posts” and bring them on a uniform ground with regards to royalty/revenue/tariff.To explore the possibilities of introducing efficiency linked tariff scheme: We do not think this is required now and suggest that tariffs should be left to the market forces since enough competition has set in and the customer having a wide choice can mutually work with the terminal operator he uses.To suggest periodicity of review of tariffs and norms: Once the normative capacities have been set, there is no need for tariff review, unless the operator seeks for a review for specified reasons like replacement/upgradation of equipment or any unforeseen circumstances. There should not be any suo moto review, only automatic changes linked with the CPI are required. As far as norms are concerned, Ministry of Shipping may take a review, every 10 years, should the economic situation/infrastructure requirements in the country so demand.The author is Secretary General, Indian Private Ports & Terminals Association.