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Public-Private Partnership (PPP) for Seaport

Infrastructure – India.
Seaports around the world are adopting Public-Private Partnership (PPP) model for
development of seaport infrastructure. This is a variant of landlord port model, where
ownership of waterfront assets legally remains as public property. In this model,
some countries especially in Great Britain the government transferred operating rights
of waterfront assets together with ownership of superstructure to private corporate
entities. In most other countries public trust or local authority transfer operating
rights of waterfront assets under Build-Operate-Transfer (BOT) contract for a
specified period – normally 30 years by awarding licence.

In most less developed countries and emerging market economies, it often happens
that PPP model gets accepted by governments through subtle external initiative.
These countries confronted with this predicament readily do not have well defined
objective or economic rationale to support PPP for developing port infrastructure.
Therefore governments flaunt varied objectives for justifying PPP depending upon the
domestic target group being addressed. They include:-

 Need for strategic private partner for development of seaport


 Inadequate financial resource with government to fund port infrastructure
 Upgradation of port to world-class standards through private partners having
experience in operating world class port.

In India Major Ports were established by creating dedicated statutory public authority
to which waterfront assets were entrusted for operating seaport in public interests.
The first such authority was established by British Colonial Government in 1879 with
the creation of Bombay Port Trust. East India Company was then acquiring
disproportionately far more waterfront assets than necessary for operating seaport.
Creation of public trust put to an end acquisition spree of foreshore land by the
Company. Other ten ports were established as public authority subsequently.

India began experimenting with PPP since 1990’s. The usual format of sequence of
events leading to PPP can be briefly summed up thus:
Government lets individual Port Trust to appoint a foreign consultant to give a report
on the port’s development. The Consultant recommends development model and
identifies the area where a specific facility such as a container terminal can be
established. Invariably the foreign consultant concurs with most of Port Trust’s
suggestions in this regard. The Consultant also suggests involvement of private
partners for building and operating the facility. In order to attract private participation
the Consultant recommends desirability of transferring existing built-in infrastructure
to the prospective private participant. The Port Trust then proceeds with pre-bid
meetings to which experienced global port operators gets invited. No Indian
Company gets qualified because in India, ports have all along remained in public
domain. Nor do Indian Companies get access for operating seaport abroad. During
pre-bid meetings prospective bidders freely suggest several conditions that would be
acceptable to them. The Port Trust chooses as many suggestions as possible to
include in the tender document inviting initially Expression of Interest followed by
Request for Qualification and finally Financial Bids from qualified bidders.

The financial bid is expressed as percentage share of revenue that the private partner
offers to port authority. This offer looks very transparent. Yet there are several
opaque elements. The private partner uses the operating right as captive facility.
They levy certain extraneous charges from users and claim that such charges do not
form part of revenue eligible to be shared with public authority. The Government
may convert the operating area into Special Economic Zone that enables the private
spv company to avail tax break on income in addition to exemption from payment of
import duty, tax and levies on input goods and equipments. All these fiscal elements
would workout to more than 33 per cent of charges levied on users. In cases where the
private partner secures operating rights by bidding to share 33 per cent revenue share,
the bid turns out to be totally illusory. In lieu of liability to pay normal tax and levies,
the private partner offers a share of revenue. In other words the private partner secures
operating right by paying nothing. The private partner attempts to secure certain
other privileges also. At present a request from the private partner is receiving
consideration by the Government. It involves bending domestic law of Cabotage so
that foreign shipping companies are attracted to the private container terminal.

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Be that as it may, the private partner pays a small upfront sum while port authority
transfers existing infrastructure for further development. Such small sum normally
works out to around 10% of the total project cost to be incurred by private participant
during forthcoming 30 years. The private partner often successfully negotiates to
reduce the asset value of superstructure being taken over from public port authority.
The private partner also buy time for making payment for assets bought from public
authority by spreading payout due to port authority over a period of years.

Private participant converts initial upfront payment made to port authority into equity
of the local SPV Company formed for project implementation. The rest of the project
cost is derived from internal generation, minority equity to local partners and loan
from domestic banks and financial institutions. In short the foreign private partner
contributes his name and goodwill while huge cost of supporting infrastructure by
way of deep approach channels, road and rail connectivity is met through public
funding. The huge share of public cost of the project is incurred upfront during initial
stage of the project development.

The concession agreements are so flexibly worded that it would be difficult decipher
what exactly are being agreed to. In result it happens that even the identity of private
partner becomes blurred. This type of situation has resulted in DP World acquiring
almost all container terminals of the Indian Major Ports at all important location in the
country. The sole and only concession awarded in India to this Company was by
Cochin Port Trust for operating a container terminal in Cochin Port. Yet DP World
has its presence all over India in the ports sector, operating major container terminals.
The route to this position was through acquisitions, despite that there exists
Competition Act 2002 enacted with the objective of preventing growth of monopoly
and for promoting competitive environment.

There is growing public perception that PPP increases efficiency and reduce transport
cost as proportion of unit value of goods in merchandise trade. This cost calculation
is computed from the point of view of shipping companies. It is true that shipping
companies have achieved economies of scale by increasing the size of ships;
modernizing cargo handling methods and reducing manning scale of seafarers
employed on board ships. All these developments imposed tremendous costs on port

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authorities and other public authorities for providing rail, road and IT connectivity as
well as advanced security infrastructure for ships. While computing transport cost the
huge expense borne by public authorities is ignored. The operational efficiency in
terms of ship day output, turn round time and tariff are on par in comparable container
terminals between private sector and public sector. There is clear evidence of this
equal operational efficiency in JNPT where a public container terminal and two other
private container terminals are in operation.

Transportation is of concern to all stakeholders. Unfortunately ship-owners dominate


here and whatever is good to them is propagated as good to the society as well. This
approach is misleading. Transport infrastructure in emerging markets is viewed as
business opportunities for entrepreneurs from developed world economies. At the
same time developed countries ensure that transport sector is kept out of WTO regime
for market access. Therefore entry into transport sector is restricted and is available
on reciprocal basis through bilateral agreements between countries. This principle is
not adhered to in India.

To sum up, there is need to evolve a PPP model through wide ranging consultations
with all stakeholders including trade unions so that an ideal template that allow for
country specific and port specific variation can be built into depending upon local
situation. Such a model must provide for:

 Well defined objective of PPP

 Unambiguous parameters of efficiency sought to be achieved through PPP

 Proportion of total project cost that private partner brings in cash

 The manner or procedure by which change of ownership or structure of


ownership of private participant if need be is to be put through.

 Cost benefits study as accepted through consensus of all stake holders


including workers.

These suggestions are open for comments and they are invited.

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