Indian ports sector: sailing through choppy waters

By Akshay Jaitly and Megha Kaladharan, Trilegal
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India’s minister for urban development and parliamentary affairs, Kamal Nath, recently announced that the country will spend US$1,000 billion on infrastructure development for the next five years, with 40% of the required investment expected to be raised from the private sector. The announcement provides the broader context for an earlier statement by the prime minister on public-private partnerships being envisaged for 42 ports for the 2012-13 fiscal year, valued at ₹145 billion (US$2.6 billion) and with a capacity of 244 million tonnes.

Given these ambitious targets, there is a need to look at whether the government is likely to achieve its vision for the ports sector in the existing environment for private investment in the sector.

Why private investment?

The government’s foreign direct investment (FDI) policy allows 100% FDI for port development projects as well as 100% income tax exemption for 10 years.

Akshay Jaitly Partner Trilegal
Akshay Jaitly
Partner
Trilegal

However, these measures have not had the desired effect in attracting private investment. Public-private partnerships can potentially help Indian ports to compete in the global marketplace by bringing in large-scale infrastructure improvements such as mechanization of cargo handling, strengthening of port connectivity by building road and rail links, capacity addition and upgrading of technology.

Despite the government’s target of capacity addition in Indian ports, investment in the sector has been sluggish largely due to uncertainty in policy and financing risks involved for private investors.

Regulatory hurdles

To attract private investment, there is a need to expedite the process for awarding port projects and for obtaining the various clearances required. Projects such as the mega container terminal in Chennai, the fourth container terminal of Jawaharlal Nehru Port Trust and the offshore container terminal of Mumbai port have been significantly delayed due to the lengthy process involved in obtaining security and environmental clearances.

The government could consider adopting the practice followed for ultra mega power projects – the incorporation of a special purpose vehicle for implementing port projects, with all requisite environmental and regulatory clearances in place prior to awarding the project. This would help to ensure that the project is in operation within a reasonable time of its award.

Megha Kaladharan Associate Trilegal
Megha Kaladharan
Associate
Trilegal

Achieving an efficient security clearance process is more complex since this clearance must be obtained from the Home Ministry, the Defence Ministry and the Ministry of External Affairs by all those who seek to bid for any port or container terminal development project. Major infrastructure companies such as Adani Port, Lanco Infratech and Punj Lloyd have been denied security clearances in the past, resulting in major setbacks to urgently required port and container terminal projects.

One solution would be to constitute a committee of all stakeholders from the relevant ministries empowered to grant final security clearance within a specified timeline. Further, this could be a one-time security clearance granted in favour of an infrastructure company, which could be reviewed by the committee when the company bids for future projects, without having to undergo a new application process for every project.

Tariff deregulation

Tariff regulation for all major ports is currently carried out by the Tariff Authority for Major Ports. According to the interim report of the High Level Committee on Financing of Infrastructure, tariff regulation at major ports has resulted in incongruities such as different tariffs for berths at the same port. In contrast, minor ports have the flexibility to set tariffs based on their need to compete in the market, which has contributed to higher traffic growth and a distinct competitive advantage over major ports.

Since sufficient competition already exists in this sector, tariff determination should be left to market forces.

What’s next?

Of the 42 projects proposed to be developed, the Shipping Ministry is currently seeking cabinet approval for only two port projects, i.e. Sagar Island in West Bengal and Ramyapattnam in Andhra Pradesh. Given the rate of progress, it is unlikely that the targets set by the government for 2012-13 will be achieved. Going forward, the government could send out a positive signal to private investors by simplifying the procedure for obtaining security and environmental clearances as well as deregulating tariffs for all ports.

Akshay Jaitly is a partner at Trilegal and Megha Kaladharan is an associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.

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