Looking beyond TAMP.....

Tariff Authority for Major Ports, India - A Critical  Review

Introduction:

Ports are considered of strategic importance to the economic and spatial development of a country. Ports have a prominent place in international trade as they provide linkages between international and domestic production and distribution networks. About 95% of the India’s foreign trade by volume and 70% by value is transported through sea.

 

In India, in the past, the development and provision of infrastructure in the port sector was largely in the hands of the government.   The liberalisation programme of the 1990s, opened up the sector to private players , thus shaping the nature of competition that is prevailing today .

The Indian port sector is clearly in a phase of transition. The Central Government recently announced a series of measures to promote foreign investment in the port sector. Meanwhile, new port sector law proposals are also under discussion. One of such proposals is the draft Major Ports Regulatory Authority Act, 2008 (MPRAA, 2009) . This Act expected to create a new Regulatory Authority for Major Ports which can be considered a successor of the Tariff Authority for the Major Ports (TAMP). Another recent proposal is the draft Indian Ports (Consolidated) Act, 2010 which is currently being discussed in the port sector.The third major document under discussion in respect to PPP projects with respect to Major Ports is the Model Concession Agreement (MCA).

For a better understanding of today’s discussion – Looking Beyond TAMP,  a short overview is given of the current structure of the Indian port sector.

A glimpse of Indian port sector

India has 13 Major Ports and approximately 185 Non- Major Ports   located in nine Maritime States and UT. With regard to the performance aspect, currently, Major Ports handle about 60% of the total cargo traffic, while Non-Major Ports account for 40% of the traffic. As per the below table it is evident that the share of the Non-Major Ports is steadily increasing over the years.

 

All ports (Major and Non Major Ports) are regulated under the Indian Ports Act, 1908 and it defines the jurisdiction of Central and State Governments over all ports in the country.

Under the Major Port Trusts Act, 1963, aMajor port is governed by a Board of Trustees nominated and controlled by the Central Government .The Trustees have to follow the policy decisions of the Central Government while their financial powers are limited. Port dues and port and terminal services’ rates are externally fixed by TAMP. There is a ceiling for capital expenditures; amounts above such ceiling have to be approved by the Central Government.

However, the jurisdiction of the Non-Major Ports are under the maritime states’ Government  (Orissa, Andhra Pradesh, Tamil Nadu, Pondicherry, Kerala, Karnataka, Goa, Maharashtra, Gujarat as well as Lakshadweep Islands and Andaman and Nicobar Islands).

TAMP as a port regulator

The introduction of private sector terminal operators in the ports during the 1990s brought about the possibility of a direct confrontation between the public Port Trusts and the private operators. In view of this the private sector representatives demanded a neutral organisation to regulate and control tariffs. As the Government was afraid of the emergence of private monopolies, the Major Ports Trust Act, 1963 was amended by Port Laws (Amendment) Act 1997 to constitute the TAMP.  The basic objective of TAMP was, and still is, regulation of fair competition.

The Tariff Authority for Major Ports (TAMP) was constituted in April 1997 to provide for an independent Authority to regulate all tariffs, both vessel related and cargo related, and rates for lease of properties in respect of Major Port Trusts and the private operators located therein. The Authority comprises a Chairperson and two Members appointed by the Central Government. Presently, the Head Quarters of the Authority is in Mumbai.

Tariff regulation is effected by TAMP according to the following principles:

- Safeguarding the various port users’ interests
- Ensuring fair and just returns to port operators
- Considering factors which encourage competition and operating efficiencies
- Deploy established costing methodologies
- Regard policy objectives of the Government
- Leverage tariffs to improve operational efficiencies
- Ensure a fair and transparent tariff fixation.

 TAMP has jurisdiction only over major port trusts and private terminals therein.  This Authority is empowered not only to notify the rates but also the conditionalities governing application of the rates.  Every notification, declaration, order and regulation of the Authority made under the MPT Act is published in the Gazette of India.

The orders notified by the Authority are final. There is no provision for appeal against these orders within the system. Aggrieved parties will have to approach the High Court for Redressal. This Authority, however, undertakes review of orders, under exceptional circumstances. The Union Government has the power to modify the Authority's Order or issue 'policy directions' on matters relating to port pricing.

The way TAMP operates is changing. With respect to tariff increases of existing terminals, a cost-plus approach was applied as per 2005 guidelines. New guidelines (2008) comprise a tariff cap which is set upfront tariff fixation for all new PPP projects based on capital cost, operating cost & optimum terminal capacity, prior to inviting bids.

International Regulatory Practices

Maritime countries use a range of regulatory instruments (including specific stipulations in concession agreements) to govern the award of concessions and/or leases . The main aim of economic regulation in the port sector is to control anti-competitive behaviour of port authorities and terminal operators resulting from imperfect market conditions. However, the focus of a port regulator may differ from country to country. Regulation may focus on tariffs, subsidies, access to facilities, investment levels, bidding requirements, performance targets and so on, depending on the objectives of the regulator.

In the international port industry,tariff fixing is a typical task of a Port Authority, respectively a terminal operator.From a business economics point of view the revenue share is a cost for the terminal operator and is usually included in its tariffs. If that is not allowed, then the costs have to be compensated by profit, which is only possible if such profit is not too restricted. 

Most concession agreements in the international port sector determine royalties on the basis of a fixed amount per unit (TEU/tonne, etc) for a minimum guaranteed throughput (fixed royalty) and a gliding downward scale of unit prices for qualities above this level (variable royalty). The tariffs are revised annually on the basis of the applicable consumer index or the US$ inflation, if applicable. Moreover, the operator gets a possessory title on the terminal area in the form of a lease agreement. The lease rent generally depends on the investments of concerned parties.

An overview of Europe port policies

With respect to the port sector there are similarities in India and Europe - there are large ports with different institutional and legal structures, located in different countries/states, competing for the same markets.

The European Commission never succeeded in regulating the legal form of Port Authorities of the Member States. Within the Community there exists a wide diversity of port management structures. The most common model in the EU is the landlord port model, which is the preferred model by the European Commission.The most important element of the European ports policy is power under the European Treaty to ensure fair competition between ports.

A recent EU publication is the EU Commission Staff working document (Communication on European Ports Policy – Full impact assessment), of 18 October 2007 which outlines actions to formulate an EU Ports policy with the below objectives

 (a) to ensure that there is sufficient port capacity available to handle the growth in EU trade

(b) to promote greater freedom of access for port services providers
(c) to promote more flexible employment patterns and social dialogue
(d) to promote fair competition within and between ports
(e) to achieve a better balance between environmental protection and economic growth objectives.

Major findings of the EU Commission

- There is a vast mosaic of port management models across Europe. Under EU procurement rules there are several factors that have an impact on whether a Port Authority or a port service provider is regarded as a public service provider acting in the general public interest or a commercial entity governed by the rules of the market place. The Commission concludes (wisely!) that it has no role in to play ‘by establishing a unique port management model’.

- The wide variety of approaches to port and terminal financing resulting from the different port management models demonstrate the need to create a level playing field for cross-border competition. Guidelines on State Aid to ports and more transparency of port accounts are needed.

- A level playing field among Port Authorities is needed with respect to access to port land and port services.

- Port & terminal construction projects must comply with national and European environmental legislation. There is a need for enhancing environmental management in ports.

- Port labour requirements have been changed as a result from automatisation and containerisation. A higher level of skills and more flexible employment patterns are required, in particular with respect to health and safety, training, freedom to select port workers and negotiate conditions of employment.

 The Commission has continued during recent years its drive towards further regulating inter and intra port competition.

( SourceRegulation of the Indian Port Sector, Mr Christiaan Van Krimpen , report for World Bank, May 2011).

Looking Beyond TAMP

 

India as an emerging world power should not wait too long to modernize its port sector in accordance with international best practices and the requirements of its increasingly modernizing and expanding economy.

Port reform and related changes in the regulatory framework is a long and difficult process.

Prices can ‘make’ or ‘break’ a port

The pricing strategy of a port is dependent on the way the port is financed and, ultimately, on the ownership status of the port. A port or a terminal operator set tariff / prices in order to achieve certain objectives (strategic pricing) such as profit maximization, throughput maximization, generation of employment and economic activity, regional development, minimization of ship time in port and the promotion of trade. High prices would normally reduce demand for port services, on the other hand, low port prices may bring clientele to the port but  investment costs may not be recovered in the long-run. The right tariff can lead a port to prosperity and growth and Tariff setting should be done by the concerned Port Authorities, terminal operators and marine services providers, respectively.

TAMP   and It’s Ambiguities

A terminal can attract traffic of a nearby (competitor) port by offering customized services or by offering price discounts. In the Indian port sector prices tend to be fairly rigid. TAMP fixes the ceilings therefore major ports cannot offer customized and value added services. The minor ports are free to offer differential services to consumers as their prices are not governed by TAMP. But they fear that if their prices are higher than the major ports, they will lose their traffic to the major ports. In all, there is little scope for competition between ports through provision of customized services. Offering too much price discounts to port users considering huge labour cost involved is impractical.

 

Revision of port tariff is a lengthy process.On receipt of a tariff proposal, it is registered as a ‘tariff case’. Once a proposal is registered as a tariff case, consultation process is initiated to promote participation of all the relevant stake holders. The proposal received from a Major Port or a Private Terminal Operator is forwarded to the concerned port user associations/major user organizations for comments. These comments are then sent to the proposer Port Trust or a Private Terminal operator as feedback information. The proposal is also internally scrutinized and necessary clarifications/additional information are obtained from the proposer. As part of the consultative process, joint hearings are organized either at the Office of the Authority or at the Port level. On behalf of the Authority, the Chairman generally presides over the hearings. Based on the totality of information collected, the Authority in its meeting decides on the proposal. The Orders passed in the meeting are notified in the Official Gazette of the Government of India. A copy of the notified Order is sent to the concerned port for implementation and to all other parties to the proceedings for information.

TAMP 2005 Guidelines – Clauses which Require a Review

Ø  Sec 2.4.1 : Cost plus approach of tariff   fixation

Ø  Sec 2.8.1 :Post July 2003 bidding, revenue share not considered as admissible cost for tariff fixation but all bidders prior to July 2003 can take revenue share as an admissible cost  for tariff computation

 Ø  Sec 3.1.8 : Tariff fixation for 3 years

Ø  Sec 3.2 : Consultative approach of tariff fixation

 

TAMP 2008 Guidelines – Clauses which Require a Review

Ø  Sec 1.3.2 : Continuance  of 2005 guidelines

Ø  Normative method of tariff fixation: Most appropriate method is followed  but other operators who have entered into a MCA prior to this guideline are severely cramped

Debatable questions:

-          Should a publicly owned and financed port be allowed to compete on price, for the same customer, with a privately owned port that has to charge higher prices in an effort to recover its investments?

-          What if these ports are in the same, economically interdependent, geographic area?  

-          Do ports need to recover infrastructure costs through pricing? And what happens if some do and others don’t while all have to compete for the same hinterland?

-           Is there such a thing as ‘efficient port pricing’ and is there scope for policy intervention to ensure a level playing field?

-          Should there be a newly formed independent sector regulator for the ports which replaces TAMP?

-          Should TAMP be transformed from a Tariff Regulator to a Competition Regulator on the basis of a new Port Competition Act applicable to all commercial ports in the country?

( Cynosure 2013 , Indian Maritime University, Dept.of Maritime Management, Cochin Campus)