Tariff Policy and Sustainable PPPs Tariff Policy and Sustainable PPPs in the Port Sector – Case Study of in the Port Sector – Case Study of

the Container Terminal Sectorthe Container Terminal Sector

Presentation To The Tariff Commission Presentation To The Tariff Commission byby

Indian Private Ports & Terminals AssociationIndian Private Ports & Terminals Association(IPPTA)(IPPTA)

September 12, 2007September 12, 2007

Although this presentation discusses the Although this presentation discusses the case study of the container terminal sector, case study of the container terminal sector,

the basic principles vis-à-vis alternatives the basic principles vis-à-vis alternatives suggested by IPPTA in the area of tariff suggested by IPPTA in the area of tariff fixation and bidding model can also be fixation and bidding model can also be

applied to the bulk cargo terminal operatorsapplied to the bulk cargo terminal operators

• 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-the-art 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

The ContextThe Context

• 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

This Presentation…This Presentation…

Benefits of Privatization in spite of Benefits of Privatization in spite of Miniscule Contribution to Total Logistic Miniscule Contribution to Total Logistic

CostsCosts

66

Growing Strategic importance of Private Growing Strategic importance of Private TerminalsTerminals During 1995-96, the entire container terminal traffic of India During 1995-96, the entire container terminal traffic of India

was being handled by Portswas being handled by Ports

‘‘Public-Private-Partnership’ in Port Sector induced private Public-Private-Partnership’ in Port Sector induced private participation participation

Post 2000, private operators due to state-of-the-art Post 2000, private operators due to state-of-the-art technology and their investments started increasing their technology and their investments started increasing their share in total container traffic handled by their respective share in total container traffic handled by their respective portsports

According to IPPTA estimates by the end of 2006, out of 7 According to IPPTA estimates by the end of 2006, out of 7 million TEUs of container throughput, an estimated 5 million million TEUs of container throughput, an estimated 5 million or 71% of the container throughput was being handled by or 71% of the container throughput was being handled by private container terminal operatorsprivate container terminal operators

TUTICORINTUTICORIN

COLOMBOCOLOMBO

COCHINCOCHIN

MUMBAI / JNPTMUMBAI / JNPTKANDLAKANDLA

KARACHIKARACHI

NEW YORKNEW YORK

NORFOLKNORFOLK

CHARLESTONCHARLESTON

HAMBURGHAMBURGROTTERDAMROTTERDAM

ANTWERPANTWERP

FELIXTOWEFELIXTOWE

ALEXANDRIAALEXANDRIAPORTSAIDPORTSAID

JEDDAHJEDDAH

SUDANSUDANHODEIDAHHODEIDAH YEDANYEDAN

DJIBOUTIDJIBOUTI

SALALAHSALALAHJEBEL ALIJEBEL ALI

QUINGDAOQUINGDAO

SHANGHAISHANGHAI

SINGAPORESINGAPORE

KUANTANKUANTANPINANGPINANG

PORT KLANGPORT KLANG

KINGSTONKINGSTON

LOS ANGELESLOS ANGELES

DAMIETTADAMIETTA

CHI WANCHI WANXIAMENXIAMENNINGBAONINGBAO

SUDANSUDAN

Dar-Es-SalamDar-Es-Salam

MombasaaMombasaa

Privatization has enhanced connectivityPrivatization has enhanced connectivity

Total Logistics cost involved in moving a 20' laden container from an ICD to US East Coast (Typical Example)

58%

15% 15%

5% 2.50% 2.50% 2%0%

10%

20%

30%

40%

50%

60%

70%

Logistics

Cos

t

Ocean Freight

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

Container Handling Charges account for Container Handling Charges account for miniscule share of Total Logistic Costsminiscule share of Total Logistic Costs

      

Benefits derived from Privatization exceed Benefits derived from Privatization exceed contribution to logistics cost-basketcontribution to logistics cost-basket

JNPT Year Number of vessels called

1994-95 388

1995-96 356

1996-97 410

1997-98 422

1998-99 654

1999-00 676

2000-01 561

2001-02 704

2002-03 708

2003-04 891

2004-05 795

2005-06 959

0

5

10

15

20

25

30

35

40

45

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

0

200

400

600

800

1000

1200

1400

1600

Gross Berth Productivity TEUs handled per vessel

The Strategic Role of TariffThe Strategic Role of Tariff

Rightly dispersed investment

Rightly timed investment

Right sized investment

Magnitude of after tax cash flows = Just and fair returns to Port operators

Tariff

BASE

SUPER STRUCTURE

The Strategic Role of Tariff in the Port SectorThe Strategic Role of Tariff in the Port Sector

Long Term Objectives of any Tariff ModelLong 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 And NotNot

Make current PPP-investments unviable and future investments unattractive

• 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

Efforts of IPPTA till date to ensure this Efforts of IPPTA till date to ensure this long term goallong term goal

Features and Impacts of Existing Bidding Features and Impacts of Existing Bidding Process and Tariff ModelProcess and Tariff Model

• 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 ‘Opportunity-Risk’ 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 Bidding Process: Features & ImpactExisting Bidding Process: 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’

Existing Tariff Model: Features & ImpactExisting Tariff Model: Features & Impact

Tariff Tariff RegimeRegime

Does not cover all recurring costs

Places a cap on rate of return

Rewards inefficient operators and encourages over-investment and underutilization

Denies efficient terminal operators the opportunity to generate investible resourcesCompresses the supply curve

Result

Existing Tariff Model: Flawed By DesignExisting Tariff Model: Flawed By Design

Excludes some costs from total costs

2 3 4

6 75 8

1Caps the permissible return on capital

Writes down value of assets employed

Generates tariffs that systematically decline even as costs rise

Rising costs include royalty to Ports

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 Impending Macroeconomic Disaster as a result of existing Tariff Modelresult of existing Tariff Model

Shrinking Capacities – An ExampleShrinking 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

1 Industry estimate

• 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

Simulating Disaster: Nhava Sheva Simulating Disaster: Nhava Sheva International Container Terminal (NSICT)International Container Terminal (NSICT)

Solutions Provided by IPPTA vis-à-vis Solutions Provided by IPPTA vis-à-vis Tariff Model – Applicable to Existing Tariff Model – Applicable to Existing

Container Terminal OperatorsContainer Terminal Operators

IPPTA’s Suggestion – A ‘Floor’ and IPPTA’s Suggestion – A ‘Floor’ and ‘Ceiling’ Model‘Ceiling’ Model

Highest tariff that an operator shall charge

Protects the users

Lowest tariff that an operator may charge

Facilitates sustained supply of quality service

Ceiling

Floor

The ceiling and floor enable terminals and their customers to work within a range of competitive and feasible tariff plans

Three Guiding PrinciplesThree Guiding Principles

Tariff-setting model must protect users - Tariff-setting model must protect users - the export and import trade – and the export and import trade – and investorsinvestors

Businesses must be able to recover costs and get viable returns on capital

Tariffs must trigger competitiveness and increased supply

      

Normative capacity

Actual volume

Operating and administration costs

Royalty at minimum guaranteed throughput

Gross assets deployed

16% return on gross assets deployed

The Six Elements of the Proposed Tariff The Six Elements of the Proposed Tariff FrameworkFramework

Normative Capacity: Example in the Case Normative Capacity: Example in the Case of Container Terminalsof Container Terminals

Normative Capacity = 113,100 TEU per Normative Capacity = 113,100 TEU per cranecrane

Source: Report by National Working Group on Normative Cost based Tariff for Container Related Charges, July 2005

Minimum Guaranteed Container Volume: Minimum Guaranteed Container Volume: The SignificanceThe Significance

Minimum guaranteed container volume or throughput Minimum guaranteed container volume or throughput is annual level of cargo guaranteed by the terminal is annual level of cargo guaranteed by the terminal operator while signing the concession agreementoperator while signing the concession agreement

Royalty at Minimum Guaranteed Royalty at Minimum Guaranteed Throughput: Why?Throughput: Why?

Since minimum guaranteed cargo or throughput Since minimum guaranteed cargo or throughput is a is a committed throughput, the royalty payable on this committed throughput, the royalty payable on this throughput is a guaranteed cost that the terminal throughput is a guaranteed cost that the terminal operator has to incur each year to be in the operator has to incur each year to be in the business of providing quality services to usersbusiness of providing quality services to users

Royalty, thus incurred, is not a capital expenditure Royalty, thus incurred, is not a capital expenditure as:as:

it is incurred with annual periodicity; andit is incurred with annual periodicity; and

it does not augment available capacity it does not augment available capacity

Royalty for Tariff Fixation and Payment to Royalty for Tariff Fixation and Payment to Ports: The ScenariosPorts: 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 ExcellencePorts’ Share of Excellence

Actual volumes

are higher than

normative capacity

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)

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

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

Payment to port

Payment to port

3030

Ports can directly subsidize tradePorts can directly subsidize trade

Ports can exhaust their right to subsidize trade Ports can exhaust their right to subsidize trade directly, in stead of penalizing the terminal operator, if directly, in stead of penalizing the terminal operator, if

they believe that tariffs are highthey believe that tariffs are high

Royalty, Payment to Ports and TradeRoyalty, Payment to Ports and Trade

Merit 1The royalty pass-through at the minimum guaranteed throughput respects the spirit and letter of public-private-partnership

Merit 2

Trade does not bear the cost of lower throughput when the actual volume is between minimum guaranteed throughput and normative capacity

Merit 3

With the proposed slab rates operative, when actual volumes exceed normative capacity, terminal operators’ share gains from higher throughput with ports and trade

Benefit to Trade

Extreme, Adverse CaseExtreme, Adverse Case

When a terminal functions below 60% of its When a terminal functions below 60% of its normative capacity then its actual volumes will be normative capacity then its actual volumes will be used for determining its tariffused for determining its tariff

This will imply that such a terminal will effectively This will imply that such a terminal will effectively have only one tariffhave only one tariff

A floor or a ceiling will not exist for such a terminalA floor or a ceiling will not exist for such a terminal

Floor isFloor 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 isCeiling 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

Enables the better management of traffic; smoothens the utilization of resources

Thereby, it will raise the overall availability and reliability of service

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

Operational Outcomes of Tariff Band: A Operational Outcomes of Tariff Band: A Virtuous Circle of Stability, Reliability and Virtuous Circle of Stability, Reliability and CompetitivenessCompetitiveness

One

TwoThree

Four

Utilizing the Bidding Framework to Rectify Utilizing the Bidding Framework to Rectify Anomalies in Tariff Model – Applicable to Anomalies in Tariff Model – Applicable to

Future BiddersFuture Bidders

Basic Model of the BidBasic Model of the Bid

Royalty/Revenue Share to be paid by the Royalty/Revenue Share to be paid by the Operator over the life of the Concession Period Operator over the life of the Concession Period shall be made public before inviting Bidsshall 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

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

Mandatory Information that must be disclosed with Mandatory Information that must be disclosed with royalty/revenue share in the Bid Documentroyalty/revenue share in the Bid Document

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 expectation by Port and Norms Royalty expectation by Port and Norms

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 semi-developed/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

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.

Definition of Consolidated Tariff and Tariff NormsDefinition of Consolidated Tariff and Tariff Norms

Transshipment containers are excluded from this definition

Specific Tariff Norms have also been conceptualized by IPPTA

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

Bid Evaluation BasisBid Evaluation Basis

The natural question is, what will be the Tariff scenario after five years?The natural question is, what will be the Tariff scenario after five years?

Tariff Adjustment FactorTariff Adjustment Factor

Adjustment Factor = 15/100 +15/100 X (L1/L0) + 15/100 X (F1/F0) +10/100 X (E1/E0) + 45/100 X (WP1/WP0)

L1 = All India average consumer price index for industrial workers on the date of AdjustmentLO = All India average consumer price index for industrial workers on the base dateF1 = Whole sale price index for fuel on the date of AdjustmentF0 = Whole sale price index for fuel on the base date

EI = Whole sale price index for electricity on the date of AdjustmentE0 = 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

Share of factors of production (excluding royalty) in the cost structure of the Operator•Labour Cost – 15%•Fuel Cost – 15%•Electricity cost – 10%•Other Expenses – 45%

Use of Tariff Adjustment FactorUse of Tariff Adjustment Factor

Tn = xTn-1 Adjustment Factor

The Operator will be allowed to increase the tariff throughout the life of the concession period by using this Tariff Adjustment

Factor

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

Benefits of IPPTA’s ModelBenefits of IPPTA’s Model

THANK YOUTHANK YOU