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Govt to revise model pact for port projects

Livemint:  May 24, 2016

Bengaluru: The government is preparing for a large-scale tinkering of a so-called model concession agreement (MCA) used by Union government-owned ports while granting rights to private firms for developing cargo-handling facilities, as it looks to boost investor sentiment in the sector through better allocation of risks between the government and the private firms amid slowing global trade.

A concession agreement sets out the terms and conditions of a port contract.

The MCA that is followed currently mandates that a private developer handles a minimum guaranteed cargo (MGC) every year specified in the 30-year contract. Failure to achieve the prescribed MGC for three consecutive years can lead to termination of the contract.

The government plans to replace MGC with a minimum guaranteed revenue (MGR) that a private developer has to pay the port authority for each year of a 30-year contract. In case gross revenue from operations falls short of MGR in a year, the private developer can make good the shortfall by paying from his pocket or let the project go into default and subsequent termination if the shortfall occurs for three consecutive years.

The MGR will be revised every year to account for inflation because it is indexed to the Wholesale Price Index (WPI) to the extent of 60%, according to the revised MCA drafted by the shipping ministry. Mint has reviewed a copy.

The prescribed MGC may not be achieved due to a variety of reasons, including those beyond the control of private developers.

“For a multi-cargo terminal, the MGR gives more flexibility,” says N. Muruganandam, managing director of Indian Ports Association. “Even if the facility is not doing well in one particular cargo, it is able to do it in some other cargo which has a higher tariff. So, we are looking at overall revenue”.

“Whereas if you go by MGC, the developer will only target a particular cargo of a certain capacity. So, it becomes more stringent. The MGR gives more flexibility because in case the tariff goes up or revenue goes up, even with less cargo, they will be able to meet the MGR,” Muruganandam added.

“MGR takes the pressure out of a developer’s mind. Cargo pressure will not be there but revenue pressure is there. Still, MGR is the right thing; it makes more logical sense,” said the chief executive officer of a Mumbai-based port operating firm.

MGR clause will kick in only when the revenue falls below MGR. If the gross revenue from the facility exceeds MGR, the developer will have to pay a share in the revenue to the government port at a rate determined through a bidding process.

Port contracts are decided on the basis of revenue share—the entity willing to share the most from its annual revenue gets the deal, typically stretching 30 years.

The new model concession agreement will provide for renegotiating the concession period either by compressing the 30-year period or extending the term if the actual average traffic exceeds the target traffic or falls short of it by more than 20%.

Any increase in the tenure of the concession period will be capped at 10 years in case an increase is necessitated due to lower traffic. However, a reduction in concession period due to higher volumes will be capped at 3 years.

The private developer may opt to pay a further premium equal to 10% of the gross revenue in lieu of a reduction in concession period.

“Our vision is to increase port capacity from 1,400 million tonnes (mt) to 3,000 mt by 2025,” Prime Minister Narendra Modi said at the Maritime Summit in Mumbai on 14 April. “We want to mobilize an investment of one lakh crore, or Rs.1 trillion, in the port sector to enable this growth. Five new ports are planned to meet the increasing demand of the export-import trade which will rise in proportion with the fast-growing Indian economy,” he said.

Cargo-handling contracts to be auctioned by Union government-owned ports will allow flexibility to its operators to move to new tariff regimes than the one prescribed at the time of signing the deal.

Currently, private developers are bound by the tariff guidelines applicable on the date of signing the concession agreement for setting the rates to be collected from users of the facilities, according to the current MCA.

“However, in the event the said tariff guidelines are either amended, revised or replaced by a fresh set of tariff guidelines at any time during the concession period (typically spanning 30 years), such amended, revised or fresh set of tariff guidelines, as the case may be, shall be the applicable tariff guidelines, provided the concessionaire (the private developer) exercises an option to recover tariff under such amended, revised or fresh set of tariff guidelines within a period of 30 days from the date of its publication in the official gazette,” the shipping ministry wrote in the draft of the revised MCA.

So far, in case the existing tariff guidelines are later amended, revised or replaced by a fresh set tariff of guidelines, it was not made applicable to an existing private developer.

The revenue share to be paid by the private developer to the port authority on the gross revenue will be computed on the maximum rate approved for the services rendered. Discounts and deferments given to users are excluded from the calculation of gross revenue.

However, if the discount offered to users is more than 10% of the ceiling rate, the developer can seek permission from the port authority to pay revenue share on the approved discounted rates.

Storage charges will also now be excluded from the computation of gross revenue in a departure from current practice.

The project promoters should hold 51% equity till three years after start of commercial operations, 26% for the next three years and exit completely thereafter. However, they can seek waiver of the 26% equity holding requirement from the government upon meeting the prescribed performance parameters during the three years after starting operations.

“This is a very good measure that will make the port sector more investor friendly. Currently, you are saddled with the facility for 30 years, you cannot sell and move on,” the chief executive of the Mumbai-based firm mentioned earlier said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.