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Port Sector: Issues & Challenges Arvind Kumar* Senior Adviser (TR) Ministry of Road Transport & Highways February 2, 2012, Mount Abu Forum of Indian Regulators.

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Presentation on theme: "Port Sector: Issues & Challenges Arvind Kumar* Senior Adviser (TR) Ministry of Road Transport & Highways February 2, 2012, Mount Abu Forum of Indian Regulators."— Presentation transcript:

1 Port Sector: Issues & Challenges Arvind Kumar* Senior Adviser (TR) Ministry of Road Transport & Highways February 2, 2012, Mount Abu Forum of Indian Regulators (FOIR) * Views are personal and do not necessarily reflect the views of the organization to which the author belongs

2 Overview: India’s Port Sector India’s seaborne trade 95% by volume & 67% by value Length of the coastline 7,517 km - 9 maritime States & 5 UTs ( including 2 island groups) Parallel competing port management & legal Systems - 12 under Major Ports Act, 1963 - 1 (Ennore) under Company Act - 184 Non-major ports Port legislation & Structure - Indian Ports Act, 1908 allows Maritime States to set up their own port systems - Major Port trust Act, 1963, regulates 12 major ports. Major Ports fall under operational & financial control of M/O shipping & subject to tariff regulation by Law Minor ports: under State Maritime Boards & free from formal tariff regulation

3 Growth Dynamics: India’s Port Sector Growth dynamics of cargo traffic (2000-2011) Overall annual growth (major & non-major) 9.2% Major ports (7.3%) & Non major ports (13.7%) As a consequence share of non major ports in cargo handled rose from 24% in 2000-01 to 36% in 2010-11 Capacity utilisation around 90% at Major ports Highest annual growth in container traffic (15%) Containerisation at about 2/3 rd of general cargo compared to global levels 80% plus. Container traffic has grown, but is uneven in pace, demand centred in North West Hinterland (60%) Indian ports have low draft, makes access of large bulk vessels problematic. Entails higher unit shipping cost for low value items. Leads to higher turnaround time & small parcel size.

4 Major & Minor Ports: Share in Cargo Traffic (In Million Tonnes) PORTS1990-912000-012005-062010-11(P) Major151.67 (92.2) 281.13 (76.3) 423.57 (73.2) 569.92 (64.4) Non- Major12.78 (7.8) 87.37 (23.7) 155.42 (26.8) 314.55 (35.6) All Ports 164.45 (100.0) 368.50 (100.0) 578.99 (100.0) 884.47 (100.0) Figures in Brackets indicate percentage to total

5 World Top 10 Cargo Ports Port2008 (Million Tonnes)2009 (Million Tonnes) 1.Shanghai (PRC)582.0590.0 2Zhoushan/Ningbo (PRC)520.1570.0 3.Singapore515.4472.3 4.Rotterdam421.1387.0 5.Tianjin (PRC)355.9380.0 6.Guangzhou (PRC)344.3375.0 7.Qingdao (PRC)300.3315.5 8.Qinhuangdao (PRC)252.2243.8 9..Hongkong (PRC)259.4243.0 10..Busan (S.Korea))241.7226.2 India (total) 744.0 (2008-09)884.5 (2010-11) Major Ports 530.8 (2008-09)569.9 (2010-11) Kandla 72.2 (2008-09)81.9 (2010-11) Source:For S.No.s 1-10, Port of Rotterdam,Statistics,2010

6 World Top 10 Container Ports Port2008 (Million TEUs)2009 (Million TEUs) 1. Singapore29.9225.87 2.Shanghai (PRC)27.9825.00 3.Hong Kong (PRC)24.4920.90 4.Shenzen (PRC)21.4018.25 5.Busan (S.Korea) 13.4511.98 6.Guangzhou (PRC)11.0011.19 7.Dubai Ports (UAE)11.8311.12 8.Zhoushan / Ningbo (PRC)11.2310.50 9.Qingdao (PRC)10.3210.26 10.Rotterdam (Netherlands)10.789.74 India Major Ports6.59 (2008-09)7.54 (2010-11) JNPT3.95(2008-09)4.27 (2010-11) Source:For S.No.s 1-10, Port of Rotterdam Authority, May 2010.

7 India’s Major Ports:APBT (2010-11

8 Draft and Average Parcel Size Port PPTKOPTHDLTPT MBPTJNPTCOPTPTKPTCHPTNMPTMOPT ENNO RE Draft (Mtr) 12.85.3-8.46.710.410.911.012.810.7- 20.0 4.6-23.512.0- 17.4 (OH) 15.414.416.0

9 Major Ports: Non Working Time at Berth

10 Port Call Charges (US$) (24Hrs stay of 50000 GRT vessel 2009-10 ) Source: Task Force on Transaction Cost in Exports, 2011, Ministry of Commerce and Industry

11 Efficiency of Container Terminals at Major Ports:2009-10 Performance Indicators of select container terminals Port/TerminalMoves/HrTEU/Mtr. TEU per Employee Dwell Time (Days)TRT (Day) Tuticorin 25118730082.60.8 Chennai 27128627972.01.1 JNPCT 1511428292.0 JNPT - NSICT 24255335632.51.6 JNPT - GTICT 30246232652.91.1 Cochin 165365796.41.4

12 TEU per meter of Berth Global Median=945

13 Productivity of Gantries (Moves/Hr), 2009-10 Global median mover per hour 30

14 Turn Round Times: Global Comparisons

15 Quayside Productivity: Global Comparisons

16 Dwell Time: India Vs Best

17 Impact of External Factors-Dwell Time ParameterIndiaSingaporeDenmark AutomationFew processes automated All custom procedures processed on line via trade net; 90% within 10% minutes of submission All customs declaration filed & processed electronically Single WindowNo single window concept in use Single window facility via trade net with links to 34 agencies; unique registration no. required Single window service single unique registration number required ExaminationRisk management system (RMS) in operation; 50% still physically examined Mainly post audit controls and use of non intrusive technology for examination 3 tier RMS & only 2 to 5% goods physically examined Help deskNo single help desk existOutsourced call centre 24*7 Duty structureReduced levels but multiple rates with exemptions makes export promotion cumbersome & complicated Single low duty rate, GST not paid on input for exports Single low duty rate, duty refund on inputs used in exports Source: Based on Task Force on Transaction Cost in Exports, 2011, M/o Commerce and Industry

18 Moving Containers: Distribution of costs The cost of moving a container fall into five major categories and the distribution of costs (as percentage of total costs) of moving containers is as follows: - inland transport (25%) - the ship/ocean freight costs (23%) - ports and terminals (21%), including stevedoring - the containers (18%), including maintenance - other costs, including container repositioning (13%) Source: Jean-Paul Rodrigue, Hofstra University; Martin Stopford, is the drive for ever bigger container ships irresistible? Lloyd’s list shipping forecasting conference, April, 2002 quoted in

19 Costs & Procedures in Foreign Trade IndiaChinaMalaysiaKoreaSingapore Documents for Export (Numbers)87734 Time to export (Days)17211885 Document to import (Numbers))95734 Time to import (Days)20241483 Cost to export *945500450742456 Cost to import*960545450742439 * US $ per container. Source: Doing Business 2010, IFC

20 Port Management Models Port TypeInfrastructureSuper structure Stevedoring labour Other functions Service port (Major Indian Ports Public Mainly public Tool port (France,some African nations) Public PrivateMainly public Landlord port (Antwerp,Rotter dam,Singapore etc PublicPrivate Mainly private Private port (UK,New Zealand) Private Mainly private

21 When to Regulate? Market power Imperfect & Asymmetric information: Operator (Agent) has an informational advantage over the Government/Regulator (Principal) Externalities: occur when production or consumption of goods/services impose costs/benefits on others which are not reflected in the prices charged for the goods & services being provided Joint provision & consumption

22 Starting Point: Efficient Markets P PcPc QcQcQ D S = Marginal Cost Pc = Marginal Revenue Optimum: MR = MC Social Welfare = Consumer Surplus + Producer Surplus

23 Philosophy of Regulation Case for Economic Regulation exists when: – Activity or industry has elements which bestow advantages of natural monopoly, it occurs when: Industry/Activity has large sunk costs and falling average costs Significant barriers to entry Locational advantages which bestow near monopoly advantages on the operator

24 The economic Characteristics of Port Infrastructure The basic port infrastructure is: - indivisible & requires large sunk costs -long lived -constructed in a specific space for a specific use => Perfect conditions for the existence of scale economies The most obvious difference with other public services: - Multiple services associated with the port infrastructure This multitasking dimension matters a lot when thinking about economic regulation, including pricing - the infrastructure provide a service: you can charge a price - the infrastructure is an input: you can charge a price

25 Why Tariff Regulation in Ports Port Trusts (PTs) can not regulate their own tariffs or of Terminal Operators due to – Conflict of Interest – Being Competitors – Need to safeguard user’s interests Therefore, the need for 3 rd Party Neutral Regulator

26 Charter of TAMP To fix scale of rates : For services rendered by the ports Rentals for use of port trust properties Fix charges for services rendered by port operators (BOT, concessionaries etc. under MPT Prescribe conditions for services rendered by Port Trusts/operators. Guiding Principles Safeguard the interest of port users; Just and fair return to operators Promote economy in use of resources & efficiency

27 Tariff Guidelines 2005: Approach Anchored on cost plus basis Cost as per estimate for future & ROCE determine tariff Revenue share/royalty not treated as cost - Except in cases prior to July 29, 2003 subject to a maximum of second lowest bidder ROCE is on sum of net fixed assets plus working capital Return on capital allowed 16% as of now -full ROCE allowed for capacity utilization of 60% & above.

28 Tariff Guidelines 2005 Approach Tariff approved by TAMP valid for 3 years Rates fixed by TAMP are ceiling rates -Ports/operators enjoy flexibility to offer rebates Tariffs fixed are -Vessel related (port dues, berth hire on GRT basis) -Pilotage sliding rates (higher for higher GRT) -Cargo related (wharfage rates) based on cargo handling Concessional tariff for coastal cargo/containers/vessels -60% of normal tariff applicable -coal, POL & iron ore are not eligible.

29 Tariff Guidelines 2005:Issues Information intensive exercise Too much emphasis on individual operator’s profitability Weak incentives for efficiency Disallowance for revenue share in tariff and its long term effects – Partial pass through of royalty/revenue share for private terminals which came prior to July 2003.

30 Tariff Guidelines 2008 Simple & Norm based No provision for midterm review – Unchanged Tariff for 30 years May not encourage regular investment by operators or May bestow windfall gains on operators if any change in planning/parameters Norms do not cover all areas of operations

31 Upfront Tariff Guidelines 2008 Committee on infrastructure found that combining cost plus model of tariff and revenue share model of bidding was untenable Recommendations – Upfront tariff – Uniform tariff cap at the same port – Normative cost based with fair return on capital – Capacity utilisation of 75% – Tariff caps to be reviewed once every five years to adjust for any unforeseen events – Tariff indexed to 60% of WPI variation Guidelines for upfront tariff setting for PPP projects – Notified in the Gazette on 26.2.2008

32 Salient Features of 2008 Guidelines TAMP to fix upfront tariff cap before bidding based on proposals from major ports – Bid document to incorporate the upfront tariff – Tariff cap set for a port would be applicable to all projects bid out subsequently for identical cargo during the next five years Approach – Normative cost based approach – Estimated capital and operating cost based on norms prescribed – Fair rate of return on capital employed (presently @ 16%) An nual indexation of upfront tariff – 60% of the variation in the WPI of the relevant year TAMP to review tariff caps – Once in five years for extra-ordinary events – Revised tariff caps applicable to subsequent PPP projects

33 Fixation of Upfront Tariff  Capacity Tariff to be fixed with reference to the optimal capacity irrespective of traffic forecast Indicative norms for capacity are prescribed in the guidelines for handling containers, iron ore, coal, liquid bulk and multipurpose cargo Optimal capacity is 70% of the maximum capacity – Lower of the quay capacity and stack yard capacity is to be adopted

34 Current Issues: Port Tariffs Tariff Models – Tariff Guidelines 2005 – Tariff Guidelines 2008 Non Major Ports outside tariff regulation Inadequate Statutory Powers – No power to compel submission of information & documents – No power to enforce its Orders

35 Rate of Return Regulation Tariffs are set to generate Annual Revenue Requirement enough to recover operating costs and fair/predetermined return on capital; – In essence limits the level of profit to be earned Operator’s cost are reviewed & costs deemed unnecessary eliminated. – Problem in determining allowable costs No incentive to operate efficiently Operator may over invest

36 Guiding Principle Regulator sets regulated rates or tariffs for the regulated entities so that the regulated rates allow the entity to earn a revenue that covers the “justified costs” of their operation, that is the costs that are necessary, unavoidable and reasonable and offer a predetermined return on assets to render regulated service at a predefined level of quality Revenue Requirement=Total Cost=Variable Cost+(Rate level*Rate Base)

37 Pitfalls of Cost Plus Regulation Motivation for over-investment (increased rate base) – ‘gold plating’ No motivation to increase productive efficiency Continuous pressure for price increase No incentive for selection of right equipment Information asymmetry at the regulator’s side: - no up-to-date operating cost information - no data on future business plans (investments, cost- reduction, etc.), - obscure picture on demand side.

38 Port pricing Models: Theoretical Perspective Presence of economies of scale => problem to implement a first best pricing policy (price equal to marginal cost) => not possible to recover investment costs. Second-best alternatives, common to other transport sectors, are: - Average-cost pricing, - Two- part tariffs, - Long-run marginal cost pricing, and the use of rental fees from concessionaires.

39 Port pricing Models: Theoretical Perspective This possible alternative: long-run marginal cost (LRMC)  It is defined as: short-run marginal cost (SRMC)+ the marginal cost of capacity (MCC) LRMC = SRMC + MCC which keeps the idea of social optimality, and at the same time, achieves full cost recovery  The idea could be: SRMC: paid by the ships MCC: paid by port services operator

40 Regulation Versus Market Failure Are there regulatory errors in setting prices? Is regulation intrusive and costly? Does it discourage long term investment? Too much focus on short term cost/prices Is regulatory innovation desirable

41 Issues in Port Sector Why are vessel related charges higher at Indian Ports. What makes high turnaround time and pre berthing detention at Indian Ports -lower levels of technology & lack of coordination amongst stakeholders How to make Indian Port sector vibrant? -Change in institutional structure(Trusts versus Corporatized entity) -Does ownership matter ? All Ports in Europe (except in the UK),Dubai, Singapore etc owned by the State -Synergy with trade and industrial policy (SEZs and FTZs). Are port related charges villain of the piece? -No, port related charges account for around 10-15% of total logistics cost. -High inland transit costs, connectivity constraints influence cargo flows/costs.

42 Issues: Port Sector Captive versus common carrier terminals Inter port and intra port competition Inter port competition constrained by hinterland economic activity, connectivity & inland transit costs Intra port competition can serve to mitigate the pricing power Intra port competition may be ineffective in situations where ownership is concentrated Financing of port infrastructure Land acquisition and environmental clearance -long gestation period for green field port projects (15 years) Scale of operations at Indian Ports -Fragmented and small compared to China -Combined throughput at Major Indian Ports barely matches that of Shanghai alone. Draft limitation restricts access of large vessels to Indian Ports resulting in: -More number of ship calls leading to congestion -Higher demand for berthing

43 Hinterland Level of Economic Activity Road/Rail Network Material Access Feeder Services Port Performance - Sum of parts! Efficiency improvements should target the entire sphere of activities and result in increased competitiveness Technology Port Equipments Software applications IT based custom & security Communication system Master Plan & port capacity Level of congestion Ability to handle large ships Geographical location Management practices Customer satisfaction Personnel quality & motivation Crane productivity Yard equipment planning & productivity Gate productivity Equipment Utilization No. of berths Port Charges Port System Efficiency is the Key Intangible Factors Terminal Efficiency Physical Features of Port

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