India set to allow re-negotiation of port contracts

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Last week, India’s cabinet committee on economic affairs (CCEA) agreed to empower the ministry of road transport and highways to amend a so-called model concession agreement (MCA) and mode of delivery for highway projects.

This could act as a precedent for vesting the shipping ministry also with powers to amend the MCA—a document that sets out the terms and conditions and the rights and obligations of the parties—for port projects.

Several port projects put to tender are stalled or delayed due to procedural complexities and policy issues relating to environment and forest clearances. While it is important to expedite the implementation of new port projects, it has also become vital to break the logjam over operational projects that are in distress due to pricing ambiguities.

In this context, it is noteworthy to see the shipping ministry considering a plan to establish a mechanism to re-negotiate terms of the public-private-partnership (PPP) projects. In tandem, it has started work on amending a law to redefine the role of the port tariff regulator and to deregulate tariff setting at the 12 ports owned by the Indian government.

Also on the radar of the shipping ministry is a proposal to resolve legacy tariff issues faced by the existing terminals.

In 2013, the ministry partially deregulated rates at the 12 ports by framing a new set of guidelines that linked tariff to market forces. The new guidelines, though, are applicable to projects bid out since August 2013.

The old private cargo handlers at the 12 ports have been demanding a similar freedom on setting rates to bring all operators under a single tariff regime.

A development that could influence and hasten the ministry’s plans is an arbitration award involving a container terminal run by Singapore’s PSA International Pte Ltd at V.O. Chidambaranar port in Tuticorin, Tamil Nadu.

The arbitration award backed a demand made by PSA-Sical Terminals Ltd—the entity that runs the container terminal at Chidambaranar port from 1998 for 30 years—to be allowed to move to a revenue share format from the existing royalty model by adopting the revenue share percentage of 55.19% quoted by ABG Container Handling Pvt. Ltd in September 2012 for a new container terminal, the second, at Chidambaranar port.

PSA had argued before the arbitration tribunal that due to the earlier rate cuts ordered by the port tariff regulator, the commercial viability of the project has been affected and, therefore, it is entitled to have the contract terms amended. This view was upheld by the arbitration tribunal.

Chidambaranar port was against amending the contract by allowing PSA to switch to a revenue share format. Chidambaranar port has filed an appeal in the Madras high court challenging the award of the arbitration tribunal. A court decision could very well determine an industry solution to a broader policy-related tariff issue facing cargo terminals.

The tariff approved in 1999 for the PSA facility in Chidambaranar port included the contractually-mandated royalty paid by PSA to the port as an item of cost.

But, in July 2003, the shipping ministry issued a policy direction, ruling that royalty or revenue share paid by private terminal operators to the government-owned ports would not be allowed as a cost item while setting tariffs.

The ministry issued this policy after it came to the conclusion that private firms were seen quoting high royalty or high share of their annual revenue with the government-owned ports during auction to win port contracts and then recovered the same from the port users.

After private firms who started operations prior to July 2003 complained that the new rule made their terminals commercially unviable, the shipping ministry issued an amendment allowing the royalty/annual revenue share paid by them to the government-owned port as a cost item for fixing tariffs.

This, however, came with a rider. To avoid likely loss to the terminal operator, the ministry said the extent of pass-through of royalty/revenue share into tariffs would be limited to the quotation of the second-highest bidder in the auction. And this arrangement will cease when the affected terminals start making profits.

PSA-Sical and other affected terminals, however, want full royalty paid to the port as a pass-through in tariffs.

In the Chidambaranar terminal arbitration case, PSA argued that the ministry’s about-turn on royalty amounted to a change in law and hence it was entitled to have the contract amended.

Many other terminals are waiting for the outcome of the court case to seek a change in contract terms.

Empowering the shipping ministry to amend the MCA for port projects would infuse a much-needed flexibility for contracts to respond to market dynamics. It will also enable the ministry alter the MCA on a case-to-case basis to suit the needs of individual projects.
-The Shipping Tribune

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