1 Tariff Policy and Sustainable PPPs in the Port Sector Presentation To The Planning Commission by Indian Private Ports & Terminals Association (IPPTA) February 1, 2007

2 95% of existing trade is through Ports Growth of trade-intensive manufacturing will be facilitated only if terminals within Ports function efficiently, 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 manufacturing sector Healthy Ports will require healthy and sustained investors who will continue to reinvest their earnings in augmenting efficiency and productivity of terminals The Context

3 Right sized investment Rightly timed investment Rightly dispersed investment Magnitude of after tax cash flows = Just and fair returns to Port operators Tariff BASE SUPER STRUCTURE The Strategic Role of Tariff in the Port Sector

4 Long Term Objectives of any Tariff Model According to IPPTA any tariff model in the long run should Ensure a sustained supply of services to trade by providing a healthy investment climate to service suppliers And Not Make current PPP-investments unviable and future investments unattractive

5 Terminal operators are neither allowed to charge a tariff based on cost-plus approach Nor are they allowed to charge tariffs that are driven by market forces Existing Tariff Model: Features & Impact Tariff Regime Does not cover all recurring costs Places a cap on rate of return Rewards inefficient operators and encourages over-investment and underutilization Denies efficient terminal operators the opportunity to generate investible resources Compresses the supply curve Result

6 Existing Tariff Model: Flawed By Design Excludes some costs from total costs Caps the permissible return on capital Writes down value of assets employed Generates tariffs that systematically decline even as costs rise Rising costs include royalty to Ports Terminal operator uses capital to cover rising costs Elimination of terminal operator from market sooner than later Capacity gets curtailed and competition diminished; this defeats the purpose of PPP

7 In the context of the exclusion of revenue share, it has been argued that a licensee can conveniently offer a revenue share of the order of 99.9% and then formulate the tariff proposal to cover all other costs and margin in the balance 0.1% The first mystery is how high the TAMP-approved tariff would have to be, if a mere 0.1% of it can cover all other costs and margin The second mystery is, if such a high proposed tariff will safeguard the interests of shippers, consignees and other Port users, and yet be approved by TAMP The 99.9% Misconceptions

8 Why Do Investors Continue To Bid? We can explain this from the perspective of real options We can explain this from the perspective of real options It is predicated on their faith in Indias growth It is predicated on their faith in Indias growth Every bid provides a window of opportunity to participate in this growth Every bid provides a window of opportunity to participate in this growth It is predicated on their faith that policymaking will become more progressive as observed in the case of telecommunications and insurance It is predicated on their faith that policymaking will become more progressive as observed in the case of telecommunications and insurance

9 Blunting Competition; Shrinking Capacity The Committee on Infrastructure (CoI) has stated that in the medium term, tariffs should find their own levels through competition, but … only after adequate capacity has been created The Committee on Infrastructure (CoI) has stated that in the medium term, tariffs should find their own levels through competition, but … only after adequate capacity has been created The existing tariff model is inconsistent with the objectives of the CoI The existing tariff model is inconsistent with the objectives of the CoI Also, it will neither inject competition nor adequate capacity – Why? Also, it will neither inject competition nor adequate capacity – Why? 1. Efficient and productive operators will be unable to make reinvestments as they would lack the ability in spite of having an intent 2. Inefficient and less productive operators that are awarded higher tariffs will provide services for a while, but at significantly lower volumes

10 Hastening the Reform We need to hasten the reform of the tariff model We need to hasten the reform of the tariff model The current all-India trade is 423 million tons, and the port capacity required by is 800 million tons (Source: Planning Commission; Approach Paper on Port Sector, ) The current all-India trade is 423 million tons, and the port capacity required by is 800 million tons (Source: Planning Commission; Approach Paper on Port Sector, ) But there is proof that the existing tariff model will not serve the capacity requirement But there is proof that the existing tariff model will not serve the capacity requirement The Mumbai Offshore Container Terminal (OCT) attracted merely two bids, and both were from construction companies The Mumbai Offshore Container Terminal (OCT) attracted merely two bids, and both were from construction companies India needs a tariff model that enables tariffs to find their own levels through intense competition and at higher capacities India needs a tariff model that enables tariffs to find their own levels through intense competition and at higher capacities

11 IPPTAs Suggestion – A Floor and Ceiling Model based on Normative Approach Highest tariff that an operator may charge Protects the users Lowest tariff that an operator may charge Facilitates sustained supply of quality service Ceiling Floor The ceiling and floor enable terminals and their customers to work within a range of competitive and feasible tariff plans

12 Spawning a Virtuous Circle IPPTAs floor and ceiling model can be specified empirically IPPTAs floor and ceiling model can be specified empirically It will lead to greater stability in tariffs since the increase or reduction will be gradual It will lead to greater stability in tariffs since the increase or reduction will be gradual It enables better management of traffic; it smoothens the utilization of resources It enables better management of traffic; it smoothens the utilization of resources Thereby, it raises the overall availability and reliability of service Thereby, it raises the overall availability and reliability of service Asset utilization will rise; Indias aggregate competitiveness will rise Asset utilization will rise; Indias aggregate competitiveness will rise

13 THANK YOU IPPTA believes that an early resolution of these concerns is a must in order to do justice to PPPs in the Port Sector