Port sector issues,challenges-2012

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  • 1. Port Sector: Issues & Challenges Arvind Kumar* Senior Adviser (TR) Ministry of Road Transport & Highways February 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
  • 2. 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
  • 3. 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.
  • 4. Major & Minor Ports: Share in Cargo Traffic (In Million Tonnes)PORTS 1990-91 2000-01 2005-06 2010-11(P) Major 151.67 281.13 423.57 569.92 (92.2) (76.3) (73.2) (64.4)Non- Major 12.78 87.37 155.42 314.55 (7.8) (23.7) (26.8) (35.6) 164.45 368.50 578.99 884.47 All Ports (100.0) (100.0) (100.0) (100.0)Figures in Brackets indicate percentage to total
  • 5. World Top 10 Cargo PortsPort 2008 (Million Tonnes) 2009 (Million Tonnes)1.Shanghai (PRC) 582.0 590.02Zhoushan/Ningbo (PRC) 520.1 570.03.Singapore 515.4 472.34.Rotterdam 421.1 387.05.Tianjin (PRC) 355.9 380.06.Guangzhou (PRC) 344.3 375.07.Qingdao (PRC) 300.3 315.58.Qinhuangdao (PRC) 252.2 243.89..Hongkong (PRC) 259.4 243.010..Busan (S.Korea)) 241.7 226.2India (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
  • 6. World Top 10 Container PortsPort 2008 (Million TEUs) 2009 (Million TEUs)1. Singapore 29.92 25.872.Shanghai (PRC) 27.98 25.003.Hong Kong (PRC) 24.49 20.904.Shenzen (PRC) 21.40 18.255.Busan (S.Korea) 13.45 11.986.Guangzhou (PRC) 11.00 11.197.Dubai Ports (UAE) 11.83 11.128.Zhoushan / Ningbo (PRC) 11.23 10.509.Qingdao (PRC) 10.32 10.2610.Rotterdam (Netherlands) 10.78 9.74IndiaMajor 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.
  • 7. India’s Major Ports:APBT (2010-11
  • 8. Draft and Average Parcel Size PPT KOPT HDL TPTPort MBPT JNPT COPT PT KPT CHPT NMPT MOPT ENNOR E 12.8 5.3-8.4 6.7 10.4 10.9 11.0 12.8 10.7- 4.6-23.5 12.0- 15.4 14.4 16.0Draft 20.0 17.4(Mtr) (OH)
  • 9. Major Ports: Non Working Time at Berth
  • 10. Port Call Charges (US$) (24Hrs stay of 50000 GRT vessel 2009-10 )Source: Task Force on Transaction Cost in Exports, 2011, Ministry of Commerceand Industry
  • 11. Efficiency of Container Terminals at Major Ports:2009-10 Performance Indicators of select container terminals TEU per Dwell TimePort/Terminal Moves/Hr TEU/Mtr. Employee (Days) TRT (Day) 25 1187 3008 2.6 0.8 Tuticorin 27 1286 2797 2.0 1.1 Chennai 15 1142 829 2.0 2.0 JNPCT 24 2553 3563 2.5 1.6JNPT - NSICT 30 2462 3265 2.9 1.1JNPT - GTICT 16 536 579 6.4 1.4 Cochin
  • 12. TEU per meter of Berth Global Median=945
  • 13. Productivity of Gantries (Moves/Hr), 2009-10 Global median mover per hour 30
  • 14. Turn Round Times: Global ComparisonsIndian ports have much longer vessel turnaround times MAERSK LINE EXAMPLEthan global best practices Indian portsVessel time spent in port1, hours, 2010Actual time spent in port … … normalised for 1,000 TEU call Cochin Cochin Los Angeles Pipapav Chennai Mundra Tuticorin Tuticorin JNPT Chennai Dubai JNPT Shanghai Los Angeles Pipavav Rotterdam Mundra (Adani) Hong Kong Rotterdam Dubai Singapore Shanghai Hong Kong Singapore1 Derived from several months of Maersk Line’s recorded statistics of port entry and exit times of their vesselsSOURCE: Maersk Line website
  • 15. Quayside Productivity: Global ComparisonsTerminal quayside productivity at Indian ports is far below global figures2008 TEU/quay meter/yr ’000 TEU/STS crane/yr STS crane spacing (m)JNPT 1,639 164 100Chennai 1,356 171 126Tuticorin 1,185 146 123 ▪ ▪ Mumbai is the Mumbai is theMundra 666 126 only port that only port that comes close comes closeCochin 612 141 to quayside to quayside performance performancePipapav1 188 173 of best of best = / practice ports practice portsT. Pelepas 2,593 207 ▪ ▪ Quayside Quayside performance performanceHong partially partially 2,205 192 affected byKong affected by scale scaleSingapore 1,730 189Port Klang 1,307 166 127Colombo 1,259 141 1121 Pipapav is in ramp-up phaseSOURCE: Containerisation International
  • 16. Dwell Time: India Vs BestIndian ports have much higher dwell times than global best practicesNumber of days, 2006 Dry bulk Container Import Export Import Export Indian average 261 201 2.0 3.8 Indian best 13 13 1.2 1.0 Indian worst 64 34 8.2 6.5 +86% +43% +186% +443% Best practice 14 14 0.6-0.8 0.6-0.81 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 comparableSOURCE: Report of the inter-ministerial group on reduction of dwell time in Indian ports, 2009
  • 17. Impact of External Factors-Dwell TimeParameter India Singapore DenmarkAutomation Few processes All custom procedures All customs declaration automated processed on line via trade net; filed & processed 90% within 10% minutes of electronically submissionSingle Window No single window Single window facility via trade Single window service concept in use net with links to 34 agencies; single unique registration unique registration no. required number requiredExamination Risk management system Mainly post audit controls and 3 tier RMS & only 2 to 5% (RMS) in operation; 50% use of non intrusive technology goods physically examined still physically examined for examinationHelp desk No single help desk exist Outsourced call centre 24*7 Outsourced call centre 24*7Duty structure Reduced levels but Single low duty rate, GST not Single low duty rate, duty multiple rates with paid on input for exports refund on inputs used in exemptions makes exports export promotion cumbersome & complicated Source: Based on Task Force on Transaction Cost in Exports, 2011, M/o Commerce and Industry
  • 18. 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
  • 19. Costs & Procedures in Foreign Trade India China Malaysia Korea SingaporeDocuments for Export (Numbers) 8 7 7 3 4Time to export (Days) 17 21 18 8 5Document to import (Numbers)) 9 5 7 3 4Time to import (Days) 20 24 14 8 3Cost to export * 945 500 450 742 456Cost to import* 960 545 450 742 439* US $ per container. Source: Doing Business 2010, IFC
  • 20. Port Management Models Port Type Infrastructure Super Stevedoring Other structure labour functionsService port Public Public Public Mainly public(Major IndianPortsTool port Public Public Private Mainly public(France,someAfrican nations)Landlord port Public Private Private Mainly private(Antwerp,Rotterdam,SingaporeetcPrivate port Private Private Private Mainly private(UK,NewZealand)
  • 21. 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
  • 22. Starting Point: Efficient Markets P S = Marginal Cost Pc Pc = Marginal Revenue Optimum: MR = MC D Qc QSocial Welfare = Consumer Surplus + Producer Surplus
  • 23. 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
  • 24. 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
  • 25. 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
  • 26. 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
  • 27. 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.
  • 28. 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.
  • 29. 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.
  • 30. 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
  • 31. 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
  • 32. 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
  • 33. 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
  • 34. 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
  • 35. 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
  • 36. 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 qualityRevenue Requirement=Total Cost=Variable Cost+(Rate level*Rate Base)
  • 37. 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.
  • 38. 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.
  • 39. 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
  • 40. 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
  • 41. 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.
  • 42. 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
  • 43. Port System Efficiency is the Key Intangible Factors •Management practices •Customer satisfactionHinterland •Personnel quality & motivation•Level of Economic Activity•Road/Rail Network•Material Access Terminal Efficiency•Feeder Services Port Performance - •Crane productivity Sum of parts! •Yard equipment planning Efficiency improvements & productivity should target the entire •Gate productivity sphere of activities and •Equipment Utilization result in increased •No. of berths competitiveness •Port ChargesTechnology•Port Equipments•Software applications Physical Features of Port•IT based custom & security •Master Plan & port capacity•Communication system •Level of congestion •Ability to handle large ships •Geographical location