In February, as Finance Minister Arun Jaitley outlined his vision for the Indian port sector in his Union Budget speech, there were nods of approval in the industry. Jaitley said the Government would encourage public sector ports to corporatise. Private ports, Jaitley added, have proved that ports can be an attractive investment possibility; and to enable public sector ports to attract private investments and leverage their huge unutilised land resources, they will be encouraged to become companies.
Experts commended the proposed corporatisation as a brilliant move to shake up the moribund management and turn the government-owned ports consumer- and investor-friendly.
But the reality is a little different. Corporatisation of ports was mooted more than a decade ago, and much water has flowed under that bridge. Official apathy and poor work ethic remain the hallmark of the public-sector ports. Only the Kamarajar Port, formerly known as Ennore port, in Tamil Nadu has so far been incorporated as a company.
If the lack of progress there is anything to go by, it’s abundantly clear that mere policy-tweaking on paper is not the solution. “So long as such ports are remote-controlled by New Delhi, and their tariffs regulated by official diktats rather than market conditions, they will remain laggards — losing business and stagnating,” says SS Kulkarni, Secretary, Indian Private Ports and Terminals Association.
Kerala perhaps represents the best example of the country’s flawed port policy today.
Set on promise
February marked the fourth year of the inauguration of Cochin Port Trust’s International Container Transhipment Terminal (ICTT), one that the then Prime Minister Manmohan Singh had hailed as a ‘milestone in India’s logistics infrastructure development’.
It was a milestone. Located in Vallarpadam, a scenic island on the Vembanad Lake, the container terminal was the country’s first international transhipment hub. At a container transhipment terminal, smaller feeder vessels bring cargos for loading onto a larger ‘mother’ ship, creating economies of scale and lowering the freight cost. Until 2011, Cochin Port’s Rajiv Gandhi Terminal was handling such cargo. The Vallarpadam terminal was expected to bring back India international cargo that otherwise was being transhipped from ports in Colombo or Dubai .
This ‘dream project’ was expected to reduce the freight cost as well as the transit time for Indian shippers as 40 per cent of the Indian international cargo is being transhipped through foreign ports. The ICTT is operated by the Dubai-based DP World under a public-private partnership (PPP) agreement with the Cochin Port Trust. The results, though, have been anything but flattering. The ₹3,500-crore terminal is struggling for survival as it is working 40 per cent below capacity. It handles about 3.5 lakh TEU (20-foot containers) of cargo, marginally up from 3.12 lakh TEUs in 2011 and way below the 5.5 lakh TEUs it needs to break even.
Rather than turning around the loss-making Cochin Port, the new terminal has further weakened it. Continuing its losing streak for the sixth year, the port, after reporting a ₹107.81-crore loss in the 2014 fiscal, is expected to report a marginally lower loss of about ₹100 crore in the current fiscal (ending March 31, 2015); it spends an equal amount annually to dredge the Vallarpadam terminal.
In a rearguard attempt two years ago, the Government granted the ICTT a Cabotage exemption, which permits foreign lines to operate feeder service between Vallarpadam and any other port in India. This was expected to attract mother vessels bringing containers from other ports.
Today, however, the Vallarpadam terminal hardly handles any transhipment cargo.
International shipping lines see no incentive in calling here. “Colombo is well-established as a transhipment hub. It recently expanded capacity with Chinese investment. To compete with Colombo, Vallarpadam has to match its cost, as well as facilities,” says an official of the Indian unit of Mediterranean Shipping Company, the world’s second largest shipping line.
But Vallarpadam’s woes are only getting worse. The Centre is now helping the Kerala Government develop a much bigger transhipment terminal at Vizhinjam, near capital Thiruvanathapuram. Already hit by low volumes, can Vallarpadam terminal survive competition in its own neighbourhood? What went wrong with the ICTT?
Sorry state of affairs
The troubled legacy of the Indian ports sector needs to be examined first.
More than two decades after India launched economic reforms, its ports remain governed by anachronistic laws. Centre-owned major ports are governed by the Major Ports Act of 1963. Private or ‘non-major’ ports, on the other hand, are administered by States under the Indian Ports Act of 1908. This dichotomy has resulted in discriminatory regulation. Government-controlled ports such as the Cochin Port Trust are regulated by the Tariff Authority for Major Ports (TAMP), whereas private ports can fix their own tariff.
Little wonder the country’s 12 ‘major’ ports are losing market share to their smaller peers. ‘Minor’ ports now handle 42 per cent of India’s cargo compared with 10 per cent in 2001.
The nearly 200 'small' ports have moved faster in creating capacity or handling traffic volume. Last year, the non-major Mundra port in Gujarat was the first in the country to handle annual traffic of 100 million tonnes. Indian ports together could handle 1.42 billion tonnes as of March 2014.
Despite being one of the oldest sectors in the country, the lack of cohesion is reflected in the absence of a coordinated National Port Development Policy. Construction of a container terminal at the Mumbai Port was halted due to a dispute between the private investor and the port management; the Shipping Ministry too delayed taking a decision. A port developed by infrastructure major L&T at Kattupalli, Tamil Nadu, struggles to find cargo even as the neighbouring Kamarajar port expands capacity. On the east coast are several private ports that can expand their capacity. But the Government plans to build two major ports at a higher capital outlay in Andhra Pradesh and West Bengal.
The need for additional port capacity is undisputed, but only where required or there is cargo availability. Mumbai’s Jawaharlal Nehru Port, the largest container port in the country, has long been facing capacity constraints. The port took more than 10 years to award the contract for a new terminal.
The growth of government ports has been impeded by various factors including tariff regulation. Some PPP terminals were forced to reduce output after the regulator lowered tariffs. There is need to end regulatory discrimination at ports and create a level playing field.
A troubled start
Vallarpadam faced rough weather from Day One. It was commissioned before dredging was completed and the draft (water depth) limitation delayed the arrival of larger vessels. When the vessels did arrive, other problems cropped up. The worst of these was a dispute between Customs officials and Special Economic Zone authorities over jurisdictional control.
Though the terminal enjoys SEZ status, the Customs office insisted on examining transhipment containers arriving from other Indian ports despite approvals obtained at their origin port. SEZ authorities objected.
In one case, Customs officials forced a shipper to unload export containers from a ship that was ready to sail. “The Terminal then became a victim of ego clashes between officials from two departments, and it is yet to recover fully from the damage inflicted on it,” says CS Kartha, President, Cochin Chamber of Commerce and Industry. Finally it took the intervention of the Prime Minister’s Office to resolve the dispute. The Customs office has now streamlined the procedure and shortened the clearance time for cargo to less than three days. “Our target is to bring it down to 48 hours,” says KN Raghavan, Commissioner of Customs, Kochi.
But the damage had been done. Cargo remained elusive for the Terminal. “The flow of containers from traditional centres like Tirupur, Coimbatore, Salem, Pollachi and Bengaluru has been slowing down,” says Prakash Iyer, President, Kochi Steamer Agents Association. The Cochin Port is also one of the costliest in the country. Terminal handling charges are about ₹6,000 for a 20-foot container. In the neighbouring VO Chidambaranar (formerly Tuticorin) Port, it is almost half at ₹3,500. “For an increase in volume, the handling charges have to be cut by at least 20 per cent,” adds Iyer. But Cochin Port is helpless as the tariff is fixed by TAMP.
Blame game
The clamour for change is now growing louder. “The operator (DP World) failed to honour the commitment on transhipment volume,” says KVA Iyer, Vice-President, Cochin Port Labour Union. “Despite being a global port operator with business association with several shipping lines, DP World could not bring any major lines to Kochi. The only solution now is to terminate the contract,” he adds.
Anil Singh, head of DP World in India, rues the starting problem. “The Terminal had to face several problems, including the delay in completion of dredging, issues with Customs clearance of transhipment containers and labour trouble. Cabotage exemption came two years later. The port lost precious time,” says Singh.
But he is hopeful of Vallarpadam handling higher volumes in the coming months. “This year, India, and particularly the Vallarpadam Terminal, will be the focus area for the company,” he says. DP World is the largest container terminal operator in the country, with four more terminals besides the one in Kochi.
Experts want the Government to foot the ₹100-crore dredging bill. While Cochin Port authorities plan to cut the dredging cost by 30 per cent by adopting the ‘nautical depth dredging’ method used by European ports, industry observer Jose Paul says the Union Government should bear the cost in Cochin as it does for Kolkata port.
“In fact, the federal government should undertake dredging at all ports as is the practice in Europe and the US,” says Paul. Despite the challenges, Cochin Port Trust’s Chairman Paul Antony is optimistic. “We should be able to achieve a breakthrough in transhipment early next year as some shipping lines are close to announcing services through the Cochin Port.” He says the overall cargo volume is picking up at Cochin Port.
“We will end the year with 3.7 lakh TEUs, up 6 per cent from last year,” he adds. Shipping companies such as Shreyas Shipping & Logistics, which started a new service linking all container ports in the country, are on board. These steps might help, but can the Vallarpadam Terminal survive the Kerala Government’s apathy?
New neighbour
For the State, Vallarpadam is now somebody else’s baby. It is instead busy laying the red carpet for private investors to develop a new port in Vizhinjam, again on the PPP model. The sops include viability gap funding from both the Centre and the State, making up more than 40 per cent of the project cost.
Though there were no bidders in the latest round, a senior official of Vizhinjam International Seaport Ltd — the company setting up the port — said Adani Ports and a consortium of the Kolkata-based Srei and Spanish firm OHL have shown interest in the estimated ₹6,000-crore project.
There are several inherent advantages at Vizhinjam, including a natural draft of over 20 metres, which is way deeper than what is available at most other major ports in the country. This will attract large container ships. Vizhinjam is also closer to the international shipping route (linking Europe, East Asia and West Asia). Its biggest advantage over Vallarpadam is its private status, with freedom to set its own tariffs.
“Despite all these advantages, it will be a big challenge for the port to compete with an established player like Colombo for transhipment cargo,” says K Ravichandran of the rating agency ICRA. Moreover, both Vizhinjam and Vallarpadam will be competing for the same international cargo now being transhipped through Colombo.
It doesn’t help either that an ongoing debate in the industry questions the rationality of transhipment terminals. “All ports in India want to be direct call ports. Any place in southern India is at short distance to the seacoast. "For the northern parts, access to sea is limited to the Gujarat coast; and long-haul inland carriage is through rail and not port-to-port transhipment.
As a result, there is no significant scope for transhipment business anywhere in India,” says KVA Iyer, Vice-President of the Water Transport Workers Federation. However, a Vallarpadam Terminal official refutes this, saying that the trend among shipping lines is to operate larger vessels, which will only call at ports with deep draft. The Kerala Government will surely hope so.
Still it is not enough to guarantee that Vizhinjam will not face the same fate as Vallarpadam.