Rationalising pricing of port services

NEW DELHI: A committee on pricing of port services headed by Planning Commission member Anwarul Hoda and comprising the economic affairs and shipping departments will shortly submit its report, in which it will favour a new system — fix port tariffs upfront and then go in for competitive bidding to select the operator on the basis of revenue sharing with the port authority.

At present, bidding takes place first and the yardstick for selecting the port/terminal operator is how much revenue the bidder is willing to share with the port authority concerned and not the bidder’s cost efficiency per se. The tariffs are later fixed by the tariff authority for major ports (TAMP) as per a cost-plus formula which lets 15% return on capital employed.

In actual practice, the bidders submit inflated figures of expenditure to TAMP and get the tariffs so fixed for three years. TAMP revises the tariffs every three years on the basis of “current traffic.” However, TAMP grossly under-estimates the future traffic (the traffic grows really fast) during the fixation of the tariff. So, even after sharing 35-50% of the revenue with the port authority, the operators are able to profitably run their businesses. This flawed method, which does not offer any incentive for cost efficiency, has been jacking up the prices of port services and thereby the cost of exports and imports.

According to an official familiar with the Hoda committee’s discussions, the committee has identified that the current method for fixing the tariffs is flawed as it does not take into account that cost of the bidder’s sharing the revenue with the port authority. If the tariffs are fixed upfront, then the tariffs could rationalise revenue sharing commitment to a large extent, he noted. If the tariffs fixed are higher than what they ought to be or vice versa, then the error will reflect on the revenue share. So, there will be a sort of an in-built incentive for rationalisation of the tariffs as well as the revenue share.

The upfront fixation of tariffs is likely to be on a normative basis. Earlier, there was a thinking that the tariffs could be fixed not in a normative manner but on the basis of rough estimates. The assumption was that revenue share bids will rationalise the overall economic cost and pricing of port services. The department of shipping, however, favoured reasonably accurate fixation of tariffs, even though the in-built rationalisation mechanism would be there. TAMP will have a reason to appropriately fix the tariffs as low tariffs would take away from revenue share (royalty) of port authorities which are government-owned.

If the prime minister’s committee on infrastructure approves the Hoda committee’s proposals, it could lead to a big reduction in transaction costs for exporters. If implemented, the proposed system could also spur investments in the port sector. The PPP model in the port sector has already gathered momentum and there would be a further fillip to this investment drive if the new system is adopted, claimed a government official.

It may be noted that even though the present flawed system let many operators make profits in select ports reporting high traffic growth, it has dampened investor enthusiasm in many other ports. This has adversely affected the modernisation-cum-capacity-building drive in the port sector. Many operators had taken TAMP to the court for wrong tariffs.

But the system which the taskforce is mulling might not be perfect either. The finance ministry had earlier proposed freeing of port tariffs and leaving the rates to be determined by the market. This proposal has been put in abeyance. In the new system also the function of tariff fixation would vest with TAMP, although the fixation would be in a more economically explicable manner. However, there is the argument that it would be practically difficult to reconcile the disparate cost structure of various ports in the country under a normative system for fixing the tariffs.

At present, the port capacity in the country is more than the throughput in absolute terms. But many ports report congestion. The congestion is due to inadequate gap between the capacity and demand in certain ports. In 2005-06, the throughput of 33 ports in the country with a capacity of 456 million tonne was reported at 423 million tonne. But capacities are not evenly disbursed and this has often resulted in congestion in major ports.

The expert opinion is that capacity should be 130% of the throughput. Such a situation would result in an environment of healthy competition. The proposed partial correction of the present flawed system of tariff fixation along with a slightly surplus, yet balanced, port capacity would force the operators to cut costs and offer services at lower prices.

This is what the policymakers should aim at in the medium term, considering that potential private investors are taking a call on investing in new ports in India. Private players apparently have confidence in India’s port sector as the country’s exports and imports are growing at a robust pace. This should be tapped by creating an environment conducive for investment. Hoda panel’s proposals are a step in that direction. At a later stage, however, port tariffs could be freed completely.