Port Sector: Issues & Challenges

Arvind Kumar*Senior Adviser (TR)

Ministry of Road Transport & HighwaysFebruary 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

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

Growth Dynamics: India’s Port SectorGrowth 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 2/3rd 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.

Major & Minor Ports: Share in Cargo Traffic

(In Million Tonnes)

PORTS 1990-91 2000-01 2005-06 2010-11(P)

Major 151.67

(92.2)

281.13

(76.3)

423.57

(73.2)

569.92

(64.4)

Non- Major 12.78

(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

World Top 10 Cargo PortsPort 2008 (Million Tonnes) 2009 (Million Tonnes)

1.Shanghai (PRC) 582.0 590.0

2Zhoushan/Ningbo (PRC) 520.1 570.0

3.Singapore 515.4 472.3

4.Rotterdam 421.1 387.0

5.Tianjin (PRC) 355.9 380.0

6.Guangzhou (PRC) 344.3 375.0

7.Qingdao (PRC) 300.3 315.5

8.Qinhuangdao (PRC) 252.2 243.8

9..Hongkong (PRC) 259.4 243.0

10..Busan (S.Korea)) 241.7 226.2

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

World Top 10 Container PortsPort 2008 (Million TEUs) 2009 (Million TEUs)

1. Singapore 29.92 25.87

2.Shanghai (PRC) 27.98 25.00

3.Hong Kong (PRC) 24.49 20.90

4.Shenzen (PRC) 21.40 18.25

5.Busan (S.Korea) 13.45 11.98

6.Guangzhou (PRC) 11.00 11.19

7.Dubai Ports (UAE) 11.83 11.12

8.Zhoushan / Ningbo (PRC) 11.23 10.50

9.Qingdao (PRC) 10.32 10.26

10.Rotterdam (Netherlands) 10.78 9.74

India

Major Ports 6.59 (2008-09) 7.54 (2010-11)

JNPT 3.95(2008-09) 4.27 (2010-11)

Source:For S.No.s 1-10, Port of Rotterdam Authority, May 2010.

India’s Major Ports:APBT (2010-11

Draft and Average Parcel Size

Port PPT KOPT HDL TPT MBPT JNPT COPT PT KPT CHPT NMPT MOPT ENNORE

Draft (Mtr)

12.8 5.3-8.4 6.7 10.4 10.9 11.0 12.8 10.7-20.0

4.6-23.5 12.0-17.4 (OH)

15.4 14.4 16.0

Major Ports: Non Working Time at Berth

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

Efficiency of Container Terminals at Major Ports:2009-10

Performance Indicators of select container terminals

Port/Terminal Moves/Hr TEU/Mtr.TEU per

EmployeeDwell Time

(Days) TRT (Day)

Tuticorin 25 1187 3008 2.6 0.8

Chennai 27 1286 2797 2.0 1.1

JNPCT 15 1142 829 2.0 2.0

JNPT - NSICT 24 2553 3563 2.5 1.6

JNPT - GTICT 30 2462 3265 2.9 1.1

Cochin 16 536 579 6.4 1.4

TEU per meter of Berth

Global Median=945

Productivity of Gantries (Moves/Hr), 2009-10

Global median mover per hour 30

Turn Round Times: Global Comparisons

10

10

10

11

12

12

18

19

20

22

48

59

Singapore

Shanghai

Dubai

Hong Kong

Rotterdam

Los Angeles

JNPT

Chennai

Tuticorin

Mundra

Pipapav

Cochin

13

14

16

17

18

18

27

28

29

32

37

46

Los Angeles

Cochin

Hong Kong

Singapore

Rotterdam

Mundra (Adani)

Pipavav

Shanghai

Dubai

JNPT

Tuticorin

Chennai

Indian ports have much longer vessel turnaround times than global best practices

1 Derived from several months of Maersk Line’s recorded statistics of port entry and exit times of their vessels

SOURCE: Maersk Line website

Vessel time spent in port1, hours, 2010

MAERSK LINE EXAMPLE

Actual time spent in port … … normalised for 1,000 TEU call

Indian ports

Quayside Productivity: Global Comparisons

141

166

189

192

207

Terminal quayside productivity at Indian ports is far below global figures

1 Pipapav is in ramp-up phase

SOURCE: Containerisation International

2008

▪ Mumbai is the only port that comes close to quayside performance of best practice ports

▪ Quayside performance partially affected by scale

▪ Mumbai is the only port that comes close to quayside performance of best practice ports

▪ Quayside performance partially affected by scale

Pipapav1 188

Cochin 612

Mundra 666

Tuticorin 1,185

Chennai 1,356

JNPT 1,639

Colombo 1,259

Port Klang 1,307

Singapore 1,730

Hong Kong

2,205

T. Pelepas 2,593

= /32

86

84

146

171

164

173

141

126

123

126

100

84

87

80

112

127

TEU/quay meter/yr ’000 TEU/STS crane/yr STS crane spacing (m)

Dwell Time: India Vs BestIndian ports have much higher dwell times than global best practices

SOURCE: Report of the inter-ministerial group on reduction of dwell time in Indian ports, 2009

Number of days, 2006

Import Export Import Export

+86%

Best practice 14

Indian worst 64

Indian best 13

Indian average 261

+43%

14

34

13

201

+186%

0.6-0.8

8.2

1.2

2.0

+443%

0.6-0.8

6.5

1.0

3.8

Dry bulk Container

1 Recent Indian average figures from Indian Ports AssociationNOTE: Based on best practices at Rotterdam and Singapore ports. Singapore is a transshipment port and thus, may not be exactly comparable

Impact of External Factors-Dwell TimeParameter India Singapore DenmarkAutomation Few processes

automatedAll custom procedures processed on line via trade net; 90% within 10% minutes of submission

All customs declaration filed & processed electronically

Single Window No 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

Examination Risk 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 desk No single help desk exist Outsourced call centre 24*7 Outsourced call centre 24*7

Duty structure Reduced 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

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 Fairplay.com.uk

Costs & Procedures in Foreign Trade

India China Malaysia Korea Singapore

Documents for Export (Numbers) 8 7 7 3 4

Time to export (Days) 17 21 18 8 5

Document to import (Numbers)) 9 5 7 3 4

Time to import (Days) 20 24 14 8 3

Cost to export * 945 500 450 742 456

Cost to import* 960 545 450 742 439

* US $ per container. Source: Doing Business 2010, IFC

Port Management ModelsPort Type Infrastructure Super

structureStevedoring

labourOther

functions

Service port(Major Indian Ports

Public Public Public Mainly public

Tool port(France,some African nations)

Public Public Private Mainly public

Landlord port(Antwerp,Rotterdam,Singapore etc

Public Private Private Mainly private

Private port(UK,New Zealand)

Private Private Private Mainly private

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

Starting Point: Efficient Markets

P

Pc

Qc Q

D

S = Marginal Cost

Pc = Marginal Revenue

Optimum: MR = MC

Social Welfare = Consumer Surplus + Producer Surplus

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

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

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 3rd Party Neutral Regulator

Charter of TAMPTo 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

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.

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.

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.

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

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

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%)

• Annual 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

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

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

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

Guiding PrincipleRegulator 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)

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.

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.

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

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

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.

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

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