Tariff Commission Final Presentation

8/3/2019 Tariff Commission Final Presentation

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Tariff Policy and Sustainable PPPsTariff Policy and Sustainable PPPsin the Port Sectorin the Port Sector Case Study ofCase Study of

the Container Terminal Sectorthe Container Terminal Sector

Presentation To The Tariff CommissionPresentation To The Tariff Commission

byby

Indian Private Ports & Terminals AssociationIndian Private Ports & Terminals Association

(IPPTA)(IPPTA)

September 12, 2007September 12, 2007


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Although this presentation discusses theAlthough this presentation discusses the

case study of the container terminal sector,case study of the container terminal sector,the basic principles visthe basic principles vis----vis alternativesvis alternativessuggested by IPPTA in the area of tariffsuggested by IPPTA in the area of tarifffixation and bidding model can also befixation and bidding model can also be

applied to the bulk cargo terminal operatorsapplied to the bulk cargo terminal operators


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95% of existing trade is through Sea Ports

Growth of trade-intensive manufacturing will be facilitated only if terminals within Ports functionefficiently, productively and profitably

Indian Ports are predominantly origin-destination Ports; they will therefore, require state-of-the-art equipment, know-how and technology, to enhance competitiveness of the manufacturingsector

Healthy Ports will require healthy and sustained investors who will continue to reinvest theirearnings in augmenting efficiency and productivity of terminals

According to Committee on Infrastructure:

Containerized cargo is expected to grow at 15.5% per annum every year

Trade handled by Indian ports is estimated to reach 877 million by 2011-12

Investment required to handle such traffic: US$ 13.5 billion in major ports and US$ 4.5

billion for minor ports, under National Maritime Development Programme

64% of the proposed investment under NMDP expected to be sourced from Private Sector

The ContextThe Context


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Discusses IPPTAs understanding on the Strategic Role of Tariff in thePort Sector

Showcases the benefits of privatization in the port sector

Explains Features and Impacts of the existing Bidding Process and TariffModel

Expounds the deleterious macroeconomic impact of existing tariffframework applicable to terminal operators on Indian trade

Sheds light on the alternatives that IPPTA has already put forward to theMinistry of Shipping and Planning Commission towards redressingproblems of existing and prospective terminal operators in the Indian portsector

This PresentationThis Presentation


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Benefits of Privatization in spite ofBenefits of Privatization in spite of

Miniscule Contribution to Total LogisticMiniscule Contribution to Total Logistic

CostsCosts


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66

Growing Strategic importance of PrivateGrowing Strategic importance of Private

TerminalsTerminals

During 1995During 1995--96, the entire container terminal traffic of India96, the entire container terminal traffic of Indiawas being handled by Portswas being handled by Ports

PublicPublic--PrivatePrivate--Partnership in Port Sector induced privatePartnership in Port Sector induced private

participationparticipation

Post 2000, private operators due to statePost 2000, private operators due to state--ofof--thethe--artarttechnology and their investments started increasing theirtechnology and their investments started increasing theirshare in total container traffic handled by their respectiveshare in total container traffic handled by their respectiveportsports

According to IPPTA estimates by the end of 2006, out of 7According to IPPTA estimates by the end of 2006, out of 7million TEUs of container throughput, an estimated 5 millionmillion TEUs of container throughput, an estimated 5 millionor 71% of the container throughput was being handled byor 71% of the container throughput was being handled byprivate container terminal operatorsprivate container terminal operators


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TUTICORINTUTICORINTUTICORINTUTICORIN

COLOMBOCOLOMBOCOLOMBOCOLOMBO

COCHINCOCHINCOCHINCOCHIN

MUMBAI / JNPTMUMBAI / JNPTMUMBAI / JNPTMUMBAI / JNPTKANDLAKANDLAKANDLAKANDLA

KARACHIKARACHIKARACHIKARACHI

NEW YORKNEW YORKNEW YORKNEW YORK

NORFOLKNORFOLKNORFOLKNORFOLK

CHARLESTONCHARLESTONCHARLESTONCHARLESTON

HAMBURGHAMBURGHAMBURGHAMBURGROTTERDAMROTTERDAMROTTERDAMROTTERDAM

ANTWERPANTWERPANTWERPANTWERP

FELIXTOWEFELIXTOWEFELIXTOWEFELIXTOWE

ALEXANDRIAALEXANDRIAALEXANDRIAALEXANDRIA

PORTSAIDPORTSAIDPORTSAIDPORTSAID

JEDDAHJEDDAHJEDDAHJEDDAH

SUDANSUDANSUDANSUDANHODEIDAHHODEIDAHHODEIDAHHODEIDAH YEDANYEDANYEDANYEDAN

DJIBOUTIDJIBOUTIDJIBOUTIDJIBOUTI

SALALAHSALALAHSALALAHSALALAH

JEBEL ALIJEBEL ALIJEBEL ALIJEBEL ALI

QUINGDAOQUINGDAOQUINGDAOQUINGDAO

SHANGHASHANGHASHANGHASHANGHA

SINGAPORSINGAPORSINGAPORSINGAPOR

KUANTANKUANTANKUANTANKUANTAN

PINANGPINANGPINANGPINANG

PORT KLANGPORT KLANGPORT KLANGPORT KLANG

KINGSTONKINGSTONKINGSTONKINGSTON

LOS ANGELESLOS ANGELESLOS ANGELESLOS ANGELES

DAMIETTADAMIETTADAMIETTADAMIETTA

CHI WANCHI WANCHI WANCHI WAN

XIAMENXIAMENXIAMENXIAMENNINGBAONINGBAONINGBAONINGBAO

SUDANSUDANSUDANSUDAN

DarDar--EsEs--SalamSalamDarDar--EsEs--SalamSalam

MombasaaMombasaaMombasaaMombasaa

Privatization has enhanced connectivityPrivatization has enhanced connectivity


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Total Logistics cost involved in moving a 20' laden container from an ICD

to US East Coast (Typical Example)

58%

15% 15%

5% 2.50% 2.50% 2%0%

10%

20%

30%

40%

50%

60%

70%

Logistics

Cost

Ocean Freight

Destination Delivery Charges

Other surcharges during road and ocean transportation

Road Transport

Container Handling Charges at the Port

Suez Surcharge

Stuffing and other CHA Charges

Container Handling Charges account forContainer Handling Charges account for

miniscule share of Total Logistic Costsminiscule share of Total Logistic Costs


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Benefits derived from Privatization exceedBenefits derived from Privatization exceed

contribution to logistics costcontribution to logistics cost--basketbasket

JNPT YearNumber of vessels

called

1994-95 388

1995-96 356

1996-97 410

1997-98 422

1998-99 654

1999-00 676

2000-01 561

2001-02 704

2002-03 708

2003-04 891

2004-05 795

2005-06 959

0

5

10

15

20

25

30

35

40

45

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

0

200

400

600

800

1000

1200

1400

1600

Gross Berth Productivity TEUs handled per vessel


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The Strategic Role of TariffThe Strategic Role of Tariff


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Magnitude of after tax

cash flows = Just and fairreturns to Port operators

Tariff

BASE

SUPER STRUCTURE

The Strategic Role of Tariff in the Port SectorThe Strategic Role of Tariff in the Port Sector


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Long Term Objectives of any Tariff ModelLong Term Objectives of any Tariff Model

According to IPPTA anytariff model in the long run

must

Ensure a sustained supply of

services to trade by providinga healthy investment climate

to service suppliers

Encourage Competitiveness

Provide a climate for creation

of additional capacity whichcan fuel growth

And NotAnd Not

Make current PPP-investments

unviable and futureinvestments unattractive


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Presentation before the Ministry of Shipping with a focuson:

o Problems associated with the existing Tariff Policy;

ando Alternative Tariff Framework based on a Floor and

Ceiling approach that would ensure efficient andsustained supply curve of terminal operatingservices

Presentation and submission of a paper to the PlanningCommission articulating the alternative bidding model thatcould be made applicable to future bids in the sector

Efforts of IPPTA till date to ensure thisEfforts of IPPTA till date to ensure this

long term goallong term goal


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Features and Impacts ofExistingBiddingFeatures and Impacts ofExistingBidding

Process and Tariff ModelProcess and Tariff Model


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Has created a dis-connect between the Bidding Process and Tariff Setting Principle

Private Operator offering the highest revenue share/royalty gets to operate the terminal

Private Operators keen on getting their foot into the Indian port sector due to growingimportance of trade in Indias and regions growth have been forced into a Opportunity-Risk evaluation as against Project-Viability evaluation

Private Operators are investing with the belief that best practices can be institutedwithin the system by participating in it rather than staying outside

High revenue share/royalty figures continue being quoted as Port Trusts competeamongst each other on creating better benchmarks vis--vis royalty/revenue share

price quotes

Bidding process has become a process to extract rents and completely neglectsconcerns of trade

Port Trusts have become pure profit generators and have abdicated their role as tradefacilitator

ExistingBidding Process: Features & ImpactExistingBidding Process: Features & Impact


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Cost plus approach excludes certain cost increases (e.g. inflationaryadjustments are being restricted to WPI vis--vis fuel, labour)

Terminals not allowed to charge tariffs that are driven by market forces

Existing Tariff Model: Features & ImpactExisting Tariff Model: Features & Impact

TariffTariffRegimeRegime

Does not cover all recurringcosts

Places a cap on rate of return

Rewards inefficient operators and encourages over-investment and

underutilization

Denies efficient terminal operators the opportunity to generateinvestible resources

Compresses the supply curve

Result


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Existing Tariff Model: FlawedBy DesignExisting Tariff Model: FlawedBy Design

Excludessome costsfrom totalcosts

2 3 4

6 75 8

1Caps thepermissiblereturn oncapital

Writes downvalue of assetsemployed

Generatestariffs thatsystematicallydecline evenas costs rise

Rising costsincluderoyalty toPorts

Terminaloperatoruses capitalto coverrising costs

Elimination ofterminal operatorfrom marketsooner than later

Capacity getscurtailed andcompetitiondiminished;This defeats thepurpose of PPP;Cost to Tradeincreases


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Impending Macroeconomic Disaster as aImpending Macroeconomic Disaster as aresult of existing Tariff Modelresult of existing Tariff Model


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Shrinking CapacitiesShrinking Capacities An ExampleAn Example

Tuticorin Container Terminal: PSA SICAL

Started Operations on December 21, 1999

Improved Efficiency and Productivity High Vessel and Crane Productivity: VR o230% (from 15 to 50 moves/hour); GCR o180% (from

10 to 28 moves/hour Quick turnaround of Vessels, Trucks and Containers: Vessel Port Stay q80% (from 2 days to

12 hrs) Integrated Services Use of Advanced IT Systems Reduction in dependency of liners on Colombo as a trans-shipment hub

Tariff Order of September 2006 fixed tariff at Rs. 980/TEU against industry norm of Rs.2500 per/TEU

Tariff fixed does not reward efficiency as well as productivity achieved

PSA SICAL was forced to seek the intervention of the Chennai High Court

High Court in its order in August 2007 has asked the Hon. Ministry and TAMP to givePSA SICAL a personal hearing and pass orders on merit


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1 Industry estimate

MGT of NSICT = 0.6 million TEU

At present traffic handled = 1.32 million TEU

Value of the goods handled @ US$ 10,0001 per TEU = US$ 13.2 billion

Assuming that NSCT decides to operate at MGT:

Estimated loss of direct and indirect employment = 6,000

Total value of trade that will suffer = US$ 6.6 billion

Loss to the Port at present royalty = Rs. (1.32-0.60) X 1150 million = Rs. 828 million

Liners will continue to charge a peak season tariff surcharge of US$ 100 per TEUbased on demand and supply

Simulating Disaster: Nhava ShevaSimulating Disaster: Nhava Sheva

International Container Terminal (NSICT)International Container Terminal (NSICT)


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Solutions Provided by IPPTA visSolutions Provided by IPPTA vis----visvisTariff ModelTariff Model Applicable to ExistingApplicable to Existing

Container Terminal OperatorsContainer Terminal Operators


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IPPTAs SuggestionIPPTAs Suggestion A Floor andA Floor and

Ceiling ModelCeiling Model

Highest tariff that anoperator shall charge

Protects the users

Lowest tariff that an

operator may chargeFacilitates sustainedsupply of quality service

Ceiling

Floor

The ceiling and floor enableterminals and theircustomers to work within arange of competitive and

feasible tariff plans


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Three Guiding PrinciplesThree Guiding Principles

TariffTariff--setting model must protect userssetting model must protect users --the export and import tradethe export and import trade andandinvestorsinvestors

Businesses must be able to recovercosts and get viable returns on capital

Tariffs must trigger competitiveness andincreased supply


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Normative capacity

Actual volume

Operating and administration costs

Royalty at minimum guaranteed throughput

Gross assets deployed

16% return on gross assets deployed

The SixElements of the Proposed TariffThe SixElements of the Proposed Tariff

FrameworkFramework


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Normative Capacity: Example in the CaseNormative Capacity: Example in the Case

of Container Terminalsof Container Terminals

Normative Capacity = 113,100 TEU perNormative Capacity = 113,100 TEU per

cranecrane

Source: Report by National Working Group on Normative Cost based Tariff for Container Related Charges, July 2005


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Minimum Guaranteed Container Volume:Minimum Guaranteed Container Volume:

The SignificanceThe Significance

Minimum guaranteed container volume or throughputMinimum guaranteed container volume or throughputis annual level of cargo guaranteed by the terminalis annual level of cargo guaranteed by the terminaloperator while signing the concession agreementoperator while signing the concession agreement


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Royalty at Minimum GuaranteedRoyalty at Minimum Guaranteed

Throughput: Why?Throughput: Why?

Since minimum guaranteed cargo or throughputSince minimum guaranteed cargo or throughputis ais acommitted throughput, the royalty payable on thiscommitted throughput, the royalty payable on this

throughput is a guaranteed cost that the terminalthroughput is a guaranteed cost that the terminaloperator has to incur each year to be in theoperator has to incur each year to be in thebusiness of providing quality services to usersbusiness of providing quality services to users

Royalty, thus incurred, is not a capital expenditureRoyalty, thus incurred, is not a capital expenditure

as:as:

it is incurred with annual periodicity; andit is incurred with annual periodicity; and

it does not augment available capacityit does not augment available capacity


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Royalty for TariffFixation and Payment toRoyalty for TariffFixation and Payment to

Ports: The ScenariosPorts: The Scenarios

Actual volumes arelower than minimumguaranteed throughput

Royalty would be a 100% pass-throughup to the maximum of (1) the minimumguaranteed royalty for tariff fixation and(2) what is payable to the port,provided the latter is payable on accountof non-achievement of volumes

Actual volumes arehigher than minimumguaranteed throughput

but are below normativecapacity

To the extent of the difference inminimum guaranteed royalty and royaltyon actual volume, royalty will not bepayable to the port and will also not be apass-through

When there is nocommitted or minimum

guaranteed throughput

Royalty payable to the port and royalty

pass-through will be at actual


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Ports Share ofExcellencePorts Share ofExcellence

Actualvolumes

are higherthan

normative

capacity

Slab One: If the actual volume exceedsnormative capacity in a range of 1% to 15%then the terminal operator shall pay a royaltyworth 15% of the royalty/TEU, which it pays onguaranteed volumes, on the excess (excess =actual volume normative capacity)

Slab Two: If the actual volume exceedsnormative capacity in a range of 16% to 30%then the terminal operator shall pay a royaltyworth 10% of the royalty/TEU, which it pays onguaranteed volumes, on the excess

Slab Three: If the actual volume exceedsnormative capacity by more than 31% then theterminal operator shall pay a royalty worth 5%of the royalty/TEU it pays on guaranteedvolumes, on the excess

Paymentto port

Paymentto port

Paymentto port


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3030

Ports can directly subsidize tradePorts can directly subsidize trade

Ports can exhaust their right to subsidize tradePorts can exhaust their right to subsidize tradedirectly, in stead of penalizing the terminal operator, ifdirectly, in stead of penalizing the terminal operator, if

they believe that tariffs are highthey believe that tariffs are high


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Royalty, Payment to Ports and TradeRoyalty, Payment to Ports and Trade

Merit 1

The royalty pass-through at the minimumguaranteed throughput respects the spirit and letterof public-private-partnership

Merit 2

Trade does not bear the cost of lower throughputwhen the actual volume is between minimumguaranteed throughput and normative capacity

Merit 3

With the proposed slab rates operative, when actualvolumes exceed normative capacity, terminaloperators share gains from higher throughput with

ports and trade


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Extreme, Adverse CaseExtreme, Adverse Case

When a terminal functions below 60% of itsWhen a terminal functions below 60% of itsnormative capacity then its actual volumes will benormative capacity then its actual volumes will beused for determining its tariffused for determining its tariff

This will imply that such a terminal will effectivelyThis will imply that such a terminal will effectivelyhave only one tariffhave only one tariff

A floor or a ceiling will not exist for such a terminalA floor or a ceiling will not exist for such a terminal


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Floor isFloor is

----------------------------------------------------------------------------------------------------------------------

Operating andadministration costs

includingdepreciation at actual

volumes

+

Royalty at minimumguaranteed

throughput underconcession

agreement

Return on grossassets deployed

+

100% of normative capacity


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Ceiling isCeiling is

----------------------------------------------------------------------------------------------------------------------

Operating andadministration costs

includingdepreciation at actual

volumes

+

Royalty at minimumguaranteed

throughput underconcession

agreement

Return on grossassets deployed

+

60% of normative capacity


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Enables the bettermanagement of traffic;smoothens the utilization ofresources

Thereby, it will raise the overallavailability and reliability ofservice

Greater stability in tariffs since theincrease or reduction will begradual

Asset utilization will rise; Indiasaggregate competitiveness willrise

Floor andceiling

Operational Outcomes of TariffBand: AOperational Outcomes of TariffBand: A

Virtuous Circle of Stability, Reliability andVirtuous Circle of Stability, Reliability and

CompetitivenessCompetitiveness

One

Two

Three

Four


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Utilizing the

Bidding

Framework to Rectify

Utilizing the

Bidding

Framework to RectifyAnomalies in Tariff ModelAnomalies in Tariff Model Applicable toApplicable to

Future BiddersFuture Bidders


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Basic Model of the BidBasic Model of the Bid

Royalty/Revenue Share to be paid by theRoyalty/Revenue Share to be paid by theOperator over the life of the Concession PeriodOperator over the life of the Concession Periodshall be made public before inviting Bidsshall be made public before inviting Bids

Operators shall be asked to submit Bidsbased on tariffs

Operator quoting the lowest tariffthroughout the life of the ConcessionPeriod wins the Bid


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Outline the quantum and quality of the civil and portinfrastructure, which the Port would be handing over to theOperator

Normative Capacity of the Terminal and Norms utilized toarrive at Normative Capacity

Services the Port shall provide to the Operator and thecharges thereof

Volumes expected to be handled by the Operator for thefirst five years

Incorporation of a non-compete clause

Mandatory Information that must be disclosed withMandatory Information that must be disclosed with

royalty/revenue share in the Bid Documentroyalty/revenue share in the Bid Document


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Terminal Operators should only be charged either royalty as a% of net revenue or a lease rent or an upfront fee and not a

combination resulting from any of these three elements

Royalty expectation by Port and NormsRoyalty expectation by Port and Norms

Royalty rate up to 5%if the Operator is only handed a water body and is

expected to create a terminal on the same to handle

prescribed normative capacity

Royalty rate bet. 5.1% 7.5%

if the Operator is provided with land, which iscompletely under developed (e.g. barren land) and

he is expected to transform it into a full-fledged

terminal with the prescribed normative capacity

Royalty rate bet. 7.6% 10%

if the Operator is provided with semi-

developed/developed land with certain limited

amenities such as a water connection, powerconnection, a semi-finished road connecting the

terminal to the Port entrance et al

Royalty rate of 15%if the Operator is being handed over a full fledged

terminal


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Consolidated Tariff = charges incurred towards movement oforigin & destination (O&D) containersfrom ship to yard and yard to ship

+charges incurred towards movement

O&D containers from terminal yard torailway depot (in case of rail boxes) andvice versa

+charges incurred towards movementO&D containers from yard to trucks andvice versa.

Definition of Consolidated Tariff and Tariff NormsDefinition of Consolidated Tariff and Tariff Norms

Transshipment containers areexcluded from this definition

Specific TariffNorms have also beenconceptualized by IPPTA


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Bidders will quote consolidated base tariffs for the first fiveyears based on their subjective estimations of tariff

Bids will have to be evaluated only on the basis of thevolumes-expectations figures made public before the bid

Operator with the lowest weighted average consolidatedtariff per TEU for the first five years will be awarded theTerminal

BidEvaluation BasisBidEvaluation Basis


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Tariff AdjustmentFactorTariff AdjustmentFactor

Adjustment Factor = 15/100 +15/100 X (L1/L0)+ 15/100 X (F1/F0) +

10/100 X (E1/E0) + 45/100 X (WP1/WP0)

L1 =All India average consumer price index for industrialworkers on the date of Adjustment

LO =All India average consumer price index for industrialworkers on the base date

F1 = Whole sale price index for fuel on the date ofAdjustment

F0 = Whole sale price index for fuel on the base date

EI = Whole sale price index for electricity on the date ofAdjustment

E0 = Whole sale price index for electricity on the base date

WPI1 = Whole sale price index on the date of Adjustment

WPI 0 = Whole sale price index on the base date

Share of factors of production (excluding

royalty) in the cost structure of the OperatorLabour Cost 15%

Fuel Cost 15%

Electricity cost 10%

Other Expenses 45%


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Use of Tariff AdjustmentFactorUse of Tariff AdjustmentFactor

Tn = xTn-1 Adjustment Factor

The Operator will be allowed to increase the tariff throughoutthe life of the concession period by using this Tariff Adjustment

Factor


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Reduces information asymmetry within the bidding model;

Provides the right climate for creating capacities thereby benefiting trade

Tries to make the Bid model pure tariff based.

Benefits the Trade with the lowest tariff and with a transparent mechanism ofhow the tariff will scale during the life of the concession period.

Compels the Operator to internalize, future efficiency gains, traffic risk, andmost importantly the impact of royalty, while quoting tariff figures.

Creates a competitive obligation on the Operator to bring in the best equipmentto serve trade efficiently.

Does not compel the Operator to introduce equipment to generate idlecapacities.

Allows the Operator retain efficiency gains.

Reduces un-necessary regulatory interference

Benefits of IPPTAs ModelBenefits of IPPTAs Model


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THANK YOUTHANK YOU

Documents

Tariff Commission Final Presentation