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The Indian dry ports sector, pricing policies and opportunities for public-private partnerships

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At the time of writing (2010), the world is witnessing the aftermath of the most severe financial sector meltdown in modern economic history caused by the real estate bubble in the United States. Its consequences on the real economy, especially in Europe, are yet to be fathomed, and this of course includes the longer-term impacts on international ocean transportation, ports and the distribution of global production.The economic recession has left the international shipping and port sectors with substantial overcapacity. This has resulted in drastic cost cutting measures on the one hand, and voluntary, often consensual, and coordinated reduction of supply on the other. These measures, together with a noticeable recovery in demand, are gradually leading again to improvement in prices charged by carriers and other transport service providers.In view of the country’s expanse; size of population; and regional inequalities, India’s dry ports (inland cargo consolidation and distribution centres) are seen by the government as a pivot of export-led growth and economic development (Haralambides & Gujar, 2011). Moreover, public and private sectors alike see the coordinated development of dry ports as the only way forward in terms of easing pressures at congested coastal ports, thus improving supply chain efficiency. In spite of this, dry port development and operations are still dominated by the public sector, under prices, capacity, land acquisition policies and other conditions that make private sector participation risky and comparatively unattractive. In order to rationalize dry port capacity and prices, this paper argues in favour of greater devolution through competition-enhancing Public-Private Partnerships (PPPs). The paper puts forward recommendations for the necessary legal, regulatory and general economic policy interventions based on international best practice, while keeping Indian specificities in the right perspective.
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The Indian dry ports sector, pricing policies and opportunities for public-private
partnerships
Hercules Haralambides
*
, Girish Gujar
Centre for Maritime Economics and Logistics (MEL), Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands
article info
Article history:
Available online 31 August 2011
Keywords:
Dry ports
Physical distribution
Port pricing
Public-private-partnerships
Containerization
Multimodal transport
Marine terminals
India
abstract
At the time of writing (2010), the world is witnessing the aftermath of the most severe nancial sector
meltdown in modern economic history caused by the real estate bubble in the United States. Its
consequences on the real economy, especially in Europe, are yet to be fathomed, and this of course
includes the longer-term impacts on international ocean transportation, ports and the distribution of
global production.
The economic recession has left the international shipping and port sectors with substantial over-
capacity. This has resulted in drastic cost cutting measures on the one hand, and voluntary, often
consensual, and coordinated reduction of supply on the other. These measures, together with a notice-
able recovery in demand, are gradually leading again to improvement in prices charged by carriers and
other transport service providers.
In view of the countrys expanse; size of population; and regional inequalities, Indias dry ports (inland
cargo consolidation and distribution centres) are seen by the government as a pivot of export-led growth
and economic development (Haralambides & Gujar, 2011). Moreover, public and private sectors alike see
the coordinated development of dry ports as the only way forward in terms of easing pressures at
congested coastal ports, thus improving supply chain efciency. In spite of this, dry port development
and operations are still dominated by the public sector, under prices, capacity, land acquisition policies
and other conditions that make private sector participation risky and comparatively unattractive. In
order to rationalize dry port capacity and prices, this paper argues in favour of greater devolution
through competition-enhancing Public-Private Partnerships (PPPs). The paper puts forward recom-
mendations for the necessary legal, regulatory and general economic policy interventions based on
international best practice, while keeping Indian specicities in the right perspective.
Ó2011 Elsevier Ltd. All rights reserved.
1. Introduction
Historically, economic growth and trade of countries has
revolved around seaports. In India, especially following the advent
of British rule, industry and commerce grew largely near and
around the old port cities of Mumbai, Chennai and Kolkata. Spatial
concentration of economic activity in these port cities has been
a key feature of Indias rapid economic development. It has been
mainly the coastal regions of India that have beneted from the
current phase of globalization, thus becoming important nodes in
regional production-transport-distribution networks.
To relieve increasing seaport bottlenecks and facilitate the
economic development of inland regions, Inland Container Depots
(ICD) and Container Freight Stations (CFS) have been developed and
linked to coastal outlets and, through these, to global supply chains.
Dry ports constitute one of several important instruments
employed by the government for the purpose of consolidation and
distribution of goods. Their functions are analogous to those of
a seaport, thus also including customs procedures and other steps
necessary to relieve congestion and delays at state border crossings
and ports, reducing in this way supply chain costs for exporters and
importers.
A dry port is the inland equivalent of a marine container terminal.
The difference in the case of an inland intermodal terminal is that the
transfer between transport modes does not require sea access. Roso
(2008) dene a dry port as an inland terminal directly connected to
seaport(s) with high capacity transport mean(s), where customers can
leave/pick up their standardized units as if directly to a seaport.
In Europe and North America, dry ports function as modal
interchange and freight storage facilities, often located at close
*Corresponding author. Tel.: þ31 10 4081456; fax: þ31 10 4089093.
E-mail addresses: haralambides@ese.eur.nl (H. Haralambides), girish.gujar@
ecorys.com (G. Gujar).
Contents lists available at ScienceDirect
Research in Transportation Economics
journal homepage: www.elsevier.com/locate/retrec
0739-8859/$ esee front matter Ó2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.retrec.2011.08.006
Research in Transportation Economics 33 (2011) 51e58
Author's personal copy
proximity to strategic rail and road hubs. They are termed differ-
ently in different countries, e.g. Strategic Rail Freight Interchanges in
the United Kingdom; Freight Villages in some countries of Western
Europe; and Inland Ports or Multimodal Transport and Distribution
Hubs in the United States. The European freight villages were
established in 1991, when the national freight village associations
of France, Italy and Spain joined forces to form a Europe-wide
association. Euro Platform currently represents 60 freight villages
in 10 European countries (Denmark, France, Germany, Greece,
Hungary, Italy, Luxembourg, Portugal, Spain and Ukraine), serving
2400 transport operators. A recent assessment of the European
freight village concept (UNESCAP, 2006) discusses its essential
functional characteristics as follows:
The main societal benet claimed for European freight villages is
that they have reduced urban trafc congestion by moving ware-
housing, distribution and some processing activities outside the
cities, to locations that make maximum use of more cost-effective
transport modes, such as rail. Best practice examples of freight
villages operating at inland locations and involving a high degree of
modal integration are to be found in the Bologna Freight Village, or
Interporto Bologna (Italy), and at the Cargo Centre Graz, a strategic
multimodal facility located in Graz, Austria. The wider economic
benets and multiplier effects of inland freight modal interchange
facilities are eloquently presented in UNCTADs enterprise cluster
concept. A well thought out application of this concept to India, in
view of the countrys size and degree of economic development,
could render user benets much more profound and measurable
than those of Europes freight villages and logistics parks.
Dry ports can potentially nurture manufacturing and service
clusters, for example, special economic- and export processing
zones. Increasingly, dry ports are located close to existing or
potential production or consumption centres. If properly planned,
the number of dry ports should depend on geography, as well as on
diversity and extent of economic activity. Indicatively, UNESCAP
(2009) suggests one dry port per one million TEU handled at the
countrys seaports. The size of dry ports would likewise vary
according to the industrial production and commercial transactions
in the area served by the facility. The size of dry ports in the
European Union is seen to vary from a yearly throughput of 40,000
TEU up to 2 million TEU; their land area similarly ranges between
30 and 200 ha; the number of associated user enterprises varies
between 25 and 100; and the number of employees varies between
7000 and 37,000 persons.
2. Dry ports and Indian specicities
One of the main constraints in the expansion of Indian dry port
capacity is the saturation of the Delhi-Mumbai road/rail link. In
order to further improve connectivity between the gateway
seaports of JNPT and Mundra on the west coast, and inland dry
ports located in the heartland of North India, the government of
India has embarked on an ambitious project. This concerns the
USD 90 billion Delhi-Mumbai Industrial Corridor (DMIC) project,
stretching over 436,500 sq. km, in six States. The project
encompasses some 20 potential high-growth economic zones, to
serve as manufacturing, services and export-oriented hubs. DMIC
shall, inter alia, create a chain of free-trade warehousing zones,
and freight logistics parks with rail and road network
connectivity.
According to Haralambides and Gujar (2012), the hinterland
containerization potential of major Indian seaports is estimated to
be at least 70%, whereas the actual container penetration from and
to hinterland locations is currently less than 35%. Furthermore, the
rail-borne container movements between the dry- and gateway
ports is currently around 35%, while an ideal ratio has been
established to be around 50% (Raghuram & Gangwar, 2007).
With growing incidence of outsourcing and offshore
manufacturing, the market for containerizable cargo, in intermodal
transport, has changed radically in recent years. Major manufac-
turers now go farther offshore in search of low labour costs, low
taxes, better market accessibility, and other advantages. This has
resulted not only in a large increase in containerized intermodal
cargo but also in a signicant increase in origin-destination
distances (Notteboom & Rodrigue, 2005).
The advent of containerization has been rather late in India and
the development of hinterland dry ports took place even later. The
share of containers in Indian Railways (IR) freight trafc in 1988-89
was less than 0.2% by weight: of a total freight volume of 302
million tons, containerized trafc accounted for less than 0.5
million tons. At the same time, international trade required more
transit-time sensitivity and small-volume customercare than
what IR, with its focus on large volumes of bulk commodities, could
provide.
On realizing the importance and potential of containerization
and intermodal business, the government of India decided toset up
a separate government-owned corporate body for the facilitation
and promotion of multimodal transport. Container Corporation of
India Ltd (CONCOR) was consequently incorporated in March 1988,
with the objective to manage change in Indias logistics architec-
ture; spearhead the container revolution in the country; build and
operate infrastructure linkages for rapid and accelerated inland
penetration of containerized international trade; develop and
promote the use of ISO containers for intra-country domestic
general cargo; aggregate cargo for unit-train operations on speci-
ed routes; and encompass the exibility of road transport, along
with robust and economical unit-train advantages of a countrywide
rail network (UNESCAP, 2006).
CONCOR has joined hands with a number of private, as well as
other public sector entities in order to develop synergies and
strengths, cost reduction, and efciency enhancements. Ab initio,
there has been a strong participation of the private sector in the
development of dry ports (ICD and CFS) in India. Of a total of 223
ICDs and CFSs approved by the Inter-Ministerial Committee (IMC),
as many as 139 (more than 62%) are in the private sector; of a total
of 131 functional ICDs and CFSs, CONCOR facilities account for only
20%. To set up satellite dry ports, the participation of agencies like
the state and central warehousing corporations, and those of the
private sector, was sought at locations where appropriate ware-
housing facilities were available. In the interim phase of develop-
ment, stripping of import containers; customs inspection; and
delivery were envisaged at some of the bonded warehouses, e.g., at
Ludhiana, Jalandhar, Amritsar, Ahmedabad, Pune and Hyderabad.
Private entrepreneurs were invited and encouraged to join hands
with CONCOR in providing capital and trained manpower for the
handling equipment (cranes, trucks, forklifts, etc.), at its dry ports.
Furthermore, CONCOR proposed to let private operators handle,
on contract or under franchise, all transport of containers and cargo
by road between the satellite CFSs and the rail-fed ICDs, and
between ICDs/CFSs and shipperspremises. It also adopted
a strategy of expanding business scope, by diversifying in allied
areas by way of alliances and joint ventures with major shipping
lines at strategic locations such as Dadri, in the vicinity of Delhi.
CONCOR has thus entered into joint ventures with four shipping
lines: Maersk Line, APL, CMA-CGM, and Transworld - with 49%
equity participation - to develop CFSs. It has also entered into the
development and operation of the third container terminal at JNPT,
through a joint venture with Maersk, with 26% equity contribution.
The terminal, with a capacity of 1.3 million TEU, became operational
in March 2006. Another joint venture has been formed with DP
H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e5852
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World, with 15% equity contribution, to develop a container
transshipment port at Vallarpadam, in Kochi (UNESCAP, 2006).
Until recently, the public sector had a near monopoly in the rail
transport of containers. At the same time, the government has been
quite keen to achieve a modal shift from road- to rail trafc
(Raghuram, 2005). The main reason for this thinking was the
greater carbon emissions caused by road transport, as well as
congestion caused by inadequate road infrastructure. However, due
to the absence of specic policy guidelines, this objective has not
yet been realized.
Several private sector logistics service providers were granted
licenses to operate block container trains on a nationwide basis in
2006. Expecting a sustained economic growth, a few license
holders commenced operations in 2007e2008. However, they were
handicapped by the lack of adequate infrastructure, such as rail-
head terminals and container rail wagons. As a consequence, they
entered into agreements with the public sector dry port operators,
having had to pay a fee for the use of their terminals. In addition to
these factors, higher capital costs ensured that the new entrants
could not be competitive either. The subsequent collapse in
demand as a result of the 2009 nancial meltdown resulted in the
creation of substantial overcapacity. In what follows, this paper
argues that, in such circumstances, and in order to ensure optimal
utilization of dry ports, the government should actively encourage
partnerships between the public and the private sector by way of
PPPs.
3. Theoretical background
Michael Porter (1998) in his seminal work on competitive
advantage has argued that, rather than a static focus on cost
minimization, competition is dynamic and rests on innovation and
the search for differentiation. This is due to the increase in countries
open to the global economy, greater efciency of international
factor markets, and diminishing factor intensity of competition.
Accordingly, a rms competitive position depends on two major
aspects: Operational effectiveness as well as strategy. To remain
competitive, a rm must maintain operational effectiveness while
at the same time create strategies which can distinguish it from
existing and potential competitors.
The major factors affecting a rms competitive advantage, as
emphasized by Porter, are the rms management structure and its
resource limitations. In an earlier work (Porter, 1990), he also
argues that there is no single common strategy or management
theory that can explain the behaviour of all rms, because different
management philosophies exist, including personal beliefs and
company culture. Rather than static, a rm is actually an evolu-
tionary creature, where past experiences and personnel have
a direct impact on future strategies and development. Admittedly,
market forces alone are not necessarily the only attributes which
can inuence the direction of the famous Porter diamond (Fig. 1). As
Porter correctly argues, even within a typical market economy,
competitive structure is often inuenced by random and unex-
pected events such as the recent nancial turmoil and, perhaps
more importantly, government policies (or absence thereof). Rather
than being a core player, however, Porter insists that the govern-
ment should only play a catalytic role by creating a favourable
economic climate for rms to compete on a level playing eld, e.g.,
by enforcing standards in service quality, encouraging competition,
introducing and enforcing non-monopolistic policies, providing
necessary aid, etc., but it should not interfere in ways that inuence
corporate management, as this could result in an ineffective and
bureaucratic culture (Porter, 1990).
In the port sector in particular, the government should aim to
achieve three missions, namely the catalyst mission (e.g. nancing
transport assets which are unlikely to get access to private or
alternative sources of nance); the statutory mission (e.g. ensuring
navigation safety, coastal management, etc.) and the facilitation
mission (e.g. public governance, trade facilitation processes, trade
integration, etc.) (Heaver, 2002).
Porters theories have gone a long way towards explaining
competitive structure, clearly dening the distinct roles of rm and
government. However, his demotion of the role of government is
certainly an issue which is highly debatable especially in the
current economic circumstances. As discussed below, in the case of
Indian dry ports, the government not only does not restrict itself to
the regulatory backseat, but is playing a pivotal role in deciding the
balancing pointwithin the Porter diamond.
4. Research methodology
Given the exploratory nature of this study, and apart from desk
research, the authors have also conducted on-site in-depth inter-
views with various stakeholders. These interviews were conducted
by phone or in person. For each question, the interviewer has
summarized, when necessary, the answer and transcribed the
results of the interview. More than 50 interviews were conducted,
with interviewees in India and abroad, including dry port opera-
tors, government ofcials, and consultants involved in Indian dry
port construction and development. Core questions asked
comprised:
1. The impacts of government policies on the dry port sector;
2. The competitive structure of the industry;
3. The overt and covert objectives of entering the industry (land
acquisition; availability of subsidies; cheap capital; improving
supply chain reliability; and, occasionally, prot);
4. Major recommendations for improvements in dry port policies;
5. The precise benets derived by dry port users;
6. Effects on the regional economy;
7. Competitive advantage pursued by the dry port operator.
(For the sake of simplicity and illustration, the information and
opinions of interviewees are referred to below as anecdotal
information).
4.1. The core issues
Due to lack of uniform demand for dry port services, the
distribution of dry ports within India is uneven, with about 40%,
30% and 30% being located within the southern, western and
Fig. 1. The Porter Competitive Diamond, authors based on Porter (1990).
H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e58 53
Author's personal copy
northern regions respectively (the central and eastern regions are
conspicuous in the comparatively smaller presence of dry ports).
This factor, in addition to several others, has led to congestion in
a few dry ports, breakdown of infrastructure and under-utilization
of capacity.
Unlike European dry ports, and due to scarcity of nancial
resources and technological and management skills, Indian dry
ports have not been innovative nor have they invested in long-term
efciency-enhancing technologies such as RFID and GPS systems.
To address this issue, the Indian government has decided to further
encourage private sector participation in the dry port sector by
granting licenses to run container trains on a nationwide basis.
Along the same lines, the government has recently encouraged the
private sector, including foreign companies, to set up and operate
dry ports at numerous locations within the country, often through
the sale or lease of land and facilities on attractive terms. It has also
entered into several joint ventures with the private sector, through
its public sector companies, to manage facilities on a BOT basis. As
a result, several multinational logistics service providers like
Schenker, Kuehne & Nagel and Prologis, along with shipping
companies like APL, MSC and Maersk Line, have entered the sector.
Referring to Porterscompetitive diamond, the objective of inviting
foreign company participation was to enhance the quality of the
diamond, so as to boost the quality of the supply chain within the
country, and thus the competitiveness of Indian manufacturing in
the global market.
Considering the relatively low value of cargo handled by Indian
dry port operators, premium tariffs are not common, certainly not
over extended periods: Almost 50% of imports consist of waste
paper, scrap iron and cotton waste. Exports too consist of low value-
added cargo such as handicrafts, brassware, raw cotton, tea and
other agricultural products (Raghuram, 2005). International trade
in such products is highly competitive and even a slight addition to
transportation and logistics costs can render such goods
uncompetitive.
Thus, the core issue of current concern for the Indian govern-
ment is how to balance the dry port diamond by enhancing its
efciency on the one hand, while simultaneously maintaining the
growth of public sector dry ports on the other hand. Indeed, the
competitive structure of the dry port industry does not have only
economic ramications, but political and social aspects also pose
equally signicant challenges. Given the problems discussed in this
section, it seems that, in some cases, within the Indian dry port
diamond, it was the government which brought in foreign dry port
operators, in an attempt to imbalance the diamond, while at the
same time, as discussed below, it is also the government which
plays a pivotal role in rebalancingthe Indian dry port diamond,so
as not to neutralize the early start-up advantages derived by public
sector ports operated by state-owned, public sector corporations.
4.2. Land pricing and distribution
In terms of land policy, state-owned corporations were often
given preferential treatment so as to ensure that new dry ports
could develop with maximum ease. The major component of the
capital cost involved in the construction of a dry port is the cost of
land. Technical industry information suggests that a typical dry port
with an annual throughput of 120,000 TEUs requires, ideally, a land
area of about 121,400 m
2
(i.e., about 30 acres) (Ecorys, 2009). The
cost of land varies according to several factors, such as location;
availability of usable land (for example, marshy land is not suitable
for dry port construction, or would require substantial expendi-
tures to make it suitable through lling and/or levelling); economic
environment; competition with other potential land users; prox-
imity to markets and gateway ports; afnity to road/rail networks;
etc. In 2009, land prices varied between USD 100,000 to 500,000
per acre. Thus, a dry port with an annual throughput of 120,000
TEUs would typically need USD 6e9 million just for land
acquisition.
Apart from land prices, acquiring land for the construction of
a dry port, especially in green-eld projects, is subject to govern-
mental permission for changing the land use purpose (in the
majority of cases, land is primarily earmarked for agricultural use).
The government, through local agencies such as the City Industrial
Development Corporation (CIDCO), appropriates the land, develops
it, and then sells or leases it to interested parties.
It should be noted that the Indian government is actually the
biggest landlord, thus possessing considerable power in the
distribution and use of land. In addition to this, the government,
through its corporate limbs, is also the biggest dry port service
provider and warehouse owner. Thus, public sector dry port owners
who are also partially listed government companies have land
available for use at token cost, well under market values. In several
instances, land has been leased out to public sector corporations for
long periods at very low, subsidized rates. The government thus
becomes a price setter for dry port services. In contrast, the private
sector is not accorded the same preferential treatment and has to
acquire land at market values.
4.3. Subsidies in operational costs
Government inuence also exists as regards coverage of oper-
ating costs of which transportation costs are also partially subsi-
dized, usually in terms of fuel subsidies. Such assistance has helped
in enhancing the competitive position of dry ports operated by
state-owned corporations. Given such assistance in both capital
and operating costs, state-owned dry ports are able to offer
signicant volume discounts. Moreover, in certain cases where the
cargo involved is time sensitive or prone to pilferage (like perish-
able products, ready-made garments and accessories, household
goods, leather goods, pharmaceuticals), the operator can demand
a premium. Indeed, it is not uncommon for the operator to rent out,
partially or sometimes entirely, the storage space to a single
customer for certain time periods against payment in advance.
4.4. Growth protectionumbrella
The government has also introduced policies which have
restrained free competition in order to allow its own newly created
dry ports gain market share. For example, new public sector dry
port operators have often been allowed to charge fees which do not
cover the capital cost during their start-up periods. Such pricing
policies have largely benetted state-owned corporations, allowing
them to develop a dominant market position.
4.5. Optimum size and the conundrum of dry port pricing
A dry port is essentially a land-intensive industry, especially in
cases where the land is located close to a central market place and
is well connected to rail and road networks. This is the rst issue
where a pricing policy encounters a major hurdle: what is the value
and the opportunity cost of land? Under what terms and conditions
is land made available to dry port operators? A piece of land located
close to a residential or commercial area is a scarce commodity
having a fairly high opportunity cost and several potential claim-
ants. Such a land can be alternatively used for residential or
commercial purposes in addition to tourism, recreation etc. In
India, the land issue becomes more complicated in old cities like
Delhi, Mumbai and Kolkata where land availability is far more
restricted due to old tenants, archaic laws, labour issues etc.
H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e5854
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As dry port related infrastructure is considered to be a public
good serving the collective interest of the entire nation, dry port
development has been considered to be within the sole purview of
the state. This was arguably true in the past, when India followed
a central planning economic development model. Among others,
this allowed for mass production, low marginal costs and the
achievement of international competitive advantage. With some
exceptions, dry port capacity was developed ahead of existing
demand from industry, agriculture or commerce, in the hope that
industry and trade activities would pick up subsequently in the
wake of the dry ports (Haralambides, Ma, & Veenstra, 1997). As
large capital requirements and long gestation periods were
expected, the development of dry port infrastructure was generally
considered to be the prerogative of the public sector.
However, as international trade picked up, followed by demand
for dry port services, the government realized that public monop-
olies could result in inefciencies, leading to the withering of gains
and, adversely affecting export-led trade ambitions. As a result, the
government eventually permitted the private sector to invest and
operate in this industry, albeit in a restricted manner. Several
private operators thus entered the sector expecting to reap hand-
some benets. Most of them were shipping companies such as APL,
MSC and Maersk, or Terminal operators like DPW and APM
terminals, who ventured into this sector with the added advantage
of their own captive cargo which they aimed to handle at their own
dry ports, and transport it by their own rail wagons. However, with
new operators joining the competition, the equation was altered:
Supply increased signicantly, leading to under-utilization of
resources. Moreover, supply did manage to cater to the increasing
demand, albeit with a slight lag due to the time required to
construct the required infrastructure such as access roads and rail
sidings.
Finally, competition between the public and the private sector
has not been taking place on a level playing eld: Massive amounts
of public monies were funnelled into dry port development in the
past, either directly or indirectly by way of overt and covert
subsidies, enabling public sector operators to consolidate a strong
market position. This has allowed them to adopt pricing policies
which have often deterred new entry. At the same time, and rein-
forcing this effect, a large and well-spread system of public dry
ports has been developed, strategically occupying prime land close
to important market places.
The creation of excess capacity has obviously had a direct impact
on pricing policies, which are examined next in connection with the
parameters considered important in the planning of a dry port.
4.6. Pricing policy
In India, about 70% of containers handled by gateway ports are
transported to hinterland dry ports, with the balance of 30%
handled locally. It should also be noted that the level of container
penetration in India is only about 35%, against a global average of
over 70%. Furthermore, it is more protable for the dry port oper-
ator, as well as the user, to transport containers by train rather than
by road. It costs less than USD 0.05 per ton-km to transport
a container by railway, as against USD 0.15 by road. As such, with
rising demand, low costs and good returns on capital, it is not
surprising that public sector dry ports with their own railheads
enjoy a distinct comparative advantage. In order to maintain its
dominance in the market, CONCOR has constructed 57 dry ports
with a total combined area of 5 million square meters. According to
the Watanabe formula discussed below (Watanabe, 2001), the
combined dry port capacity of CONCOR is over 10 million TEUs.
However, atpresent, CONCOR utilizes only one fth of this capacity.
This substantial excess capacity allows CONCOR to dominate the
market quite effectively, thus driving out competition. CONCORs
market position is further strengthened by rolling stock ownership
of over 5000 rail wagons.
A convenient starting point for all calculations regarding
terminal capacity; number of ground slots; etc., is the theoretical
approach to planning. An important factor to consider when
planning stacking area requirements is the peak-factor. The
following formula developed by Watanabe (2001), is usually
adopted for computing the size of a proposed (dry) port.
C¼ðL*H*W*KÞ=ðD*FÞ(1)
Where,
C: annual capacity (TEU/year),
L: number of container ground slots (in TEU),
H: mean stacking height of containers,
W: percentage of working slots (0 <W1),
K: total number of working days in the period (365 days per
year),
D: mean container dwell time in the container yard,
F: peaking factor (1 <F<1.5)
Establishing the optimum size of a dry port is an iterative
decision which has to satisfy a number of technical, commercial,
and legal requirements. The optimum size of a dry port is derived
from projections of existing and future demand for dry port
services. The aspect of optimum size becomes important in view of
required investments; competing residential and commercial
demands for land; pattern of trafcows between dry- and
gateway ports; type of commodities transported; directional-split
(imports/exports); proportions of less-than-container load (LCL)
and full-container-load (FCL); forecast of future growth; modes of
transport available; and overall minimization of hinterland trans-
port distances.
In addition to economic viability, the attractiveness of a dry port
to users also needs to be taken into account. Dry ports with their
own railheads are preferred by customers. However, the minimum
size of such a rail-connected dry port is 10 ha, as additional space is
required for the stabling and turnaround of the rail rakes. The
availability of such a large piece of prime land, at a competitive
price, is difcult, to say the least. Furthermore, rail transport pricing
depends on the haulage rates charged by Indian Railways. The
movement of empty containers, as well as empty (naked) wagons is
also charged for by the railways. Dry port operators also have to pay
stabling charges, if the rakes are detained outside the dry port for
want of space inside the facility. The wagons are required to be
inspected periodically. Indian Railways has become more liberal
with its inspection frequency, as the modern BLC (Container Flat
Wagon) wagons (pioneered by CONCOR) have been found to be
more reliable. Whereas in the 1990s each wagon was inspected by
Train Examiner before each journey, wagons can now move freely
for 6000 km without intermittent inspection. This improves wagon
turnaround, and productivity gains are often shared with the
customer.
CONCOR began operations from dry ports which were built on
land leased from railways at attractive terms. In its early years,
CONCOR had to pay lease charges based on the number of
containers handled, with no regard to the area it had leased from
the railways. This resulted in CONCOR acquiring terminals as large
as possible, which it could then develop in phases in the future. This
not only provided CONCOR with adequate room for expansion, but
it generated huge surpluses for fuelling its future growth. In several
instances, the ground rent received by CONCOR for the stacking of
containers was more than the total operating expenditure of the
terminal, which also included the land lease charges paid to the
government.
H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e58 55
Author's personal copy
While determining its tariffs, CONCOR takes the following
factors into consideration:
Freight payable to railways (as IR also acts as a rail transport
sub-contractor)
Historical average of load factors (due to limited and unequal
availability of two way trafc)
Historical average of terminal detentions (average turnaround
time required by rakes)
Transit times in the sector ecompetitorsstrength (trafc
demand by other users such as passengers, grains and defence
cargo, having higher priorities)
Earnings from other operations of the terminal
To recover initial capital costs such as land acquisition, levelling,
paving, access roads etc., a private dry port operator needs to charge
a price equal to his long-run average cost (LRAC). This automatically
puts him at a competitive disadvantage vis à vis a public operator
whose investment costs need not be recovered, being the owner-
shipof the populace by and large. The, consequently, higher price
does not compensate the private operator for his loss of custom,
particularly as his (public) competitors are unlikely to follow suit in
a price increase. The demand for dry port services is thus kinked
(Haralambides, 2002, 2004), as the one depicted in Fig. 2.
In such circumstances a new entrant has two alternatives (in the
absence of subsidies):
1. Provide the service at below costs and incur losses,
2. Lose market share and eventually exit the market altogether.
Either way, this will most probably lead to concentration which
is inimical to the interests of the consumer.
It has already been mentioned above that the creation of excess
capacity by CONCOR and its adoption of certain limit pricing policies
act as entry barriers to competition. This is illustrated in the
example of Fig. 3 (Haralambides, 2004).
Assume dry port A ewith average cost curve AC
1
and demand
D
1
D
2
eis a government-owned (incumbent) facility with a domi-
nant position in the market it serves. The port has been established
over several years with the help of public investments, both in the
dry port itself, as well as in the related infrastructure (access roads,
rail lines and links, etc.). As a result, port A has strategically
developed capacities well in excess of existing demand, enabling it
to meet a substantial part of the trade. Having been nanced
predominantly through public money, the port does not have to
depreciate past investments or to fully recover its costs. For a given
level of demand, Q
1
, port A can thus set prices at P
1
, having a unit
cost equal to OC. The port enjoys economic rent of a magnitude
equal to the area CBAP
1
.
Now consider a privately owned dry port B (new entrant) that
needs to recover its costs in full (no government subsidies or
preferential terms). Port Bs average cost curve is represented by
AC
2
and, following entry, it expects the demand for its services to be
given by d
1
d
2
. Upon entry, Bs throughput is OQ
2
and at current
prices it incurs a loss equal to P
1
P
2
FE. This is caused by its higher
xed costs as a result of the need for full cost recovery.
4.6.1. Public-private partnerships
A PPP involves the private sector in aspects of infrastructure
development, or provision of new or existing infrastructure
services that have traditionally been provided by the government.
PPPs are usually long-term projects based on a contract or
concession agreement between the government (or a statutory
entity) on one side, and a private sector company on the other,
aimed at delivering an infrastructure service at a fee. Typically,
a special company, often termed a special purpose vehicle (SPV), is
accorded the task to build and maintain the infrastructure. It is
often the SPV that signs the contract with the government and sub-
contractors, to build the facility. The PPP contract also incorporates
a risk mitigation framework which apportions risks amongst the
parties.
While many governments have actually reformed their infra-
structure and utilities without private participation, some seek
nance and expertise from private companies, often foreign ones to
ease scal constraints and increase efciency. By engaging the
private sector and giving it well-dened responsibilities, govern-
ments broaden their options in terms of delivering better services.
The range of options for PPPs has expanded enormously over
the past 30 years. Agreements between public and private entities
take many forms and sizes, for both new and existing services. At
one end of the spectrum there is a management or service contract
whereby the public sector pays a fee for a service. At the other end
there is full privatization or divestiture (outright sale), where the
government sells assets to a private company. Outsourcing has
recently become another popular option. Here, a private company
would handle an aspect of a service, such as billing, metering,
transport or even cleaning of facilities.
Fig. 2. Dry port competition: kinked demand.
Fig. 3. Limit pricing strategies of public dry ports.
H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e5856
Author's personal copy
Hybrid models of PPPs have seen explosive growth in recent
years, especially with the development of a more diversied pool of
emerging market investors and operators with local expertise.
These models often rely on simpler contractual agreements and
blend public and private money to diversify risks.
Often, there are certain misconceptions about the meaning of
the word partnership in PPPs. Rather than the common meaning of
the word in terms of joint work towards a common objective,
partnership in a PPP context involves some rather distinct objec-
tives: The challenges for the public sector are to provide modern,
efcient, and high quality public services; promote competition;
curtail public expenditure; reduce general government budget
decit; increase foreign direct investment (FDI); introduce
advanced foreign technology; and, often, reduce public sector
employment. In pursuing the above, the government needs to
ensure that abusive monopolies are not created as a result of
devolution; adequate monitoring and price controls are in place;
benets from the PPP are shared with the general populace; and
nally the economic outcome of the partnership furthers the
economic and developmental plans and objectives of the country.
The private sector on the other hand needs to ensure that its
long-term investments receive an adequate return on capital, at
least equal to its opportunity cost; mitigate investment risks, at
least during the gestation period of the investments; transparency,
consistency and stability prevails in contractual arrangements and
terms; a stable and trustworthy political and public administration
system is in place; and, nally, generally accepted accounting
principles (GAAP) are adopted to assess costs, revenues, prots and
dividends to investors.
The IR is prima facie encouraging public-private partnership
(PPP) in its capacity enhancing and modernizing efforts. Projects
through the PPP model have started in a few sectors and are
envisaged in others. The functions of IR can broadly be divided into
core activities, such as transportation of passengers and freight, and
non-core involvements such as operating catering units, hospitals,
and education facilities. However, the Indian Railways Act stipulates
that no private sector participation is permitted in the operation of
trains. Thus, PPP contracts are specied in a document called the
Model Concession Agreement (MCA). This document plays a pivotal
role in the implementation of a project. It also spells out the
formula for revenue sharing, among other important details.
In 2006, IR awarded licenses for container operations to 14
private sector companies, thus ending the monopoly of CONCOR.
Most of the new licensees are likely to use the concessions for
developing their own commercial operations, but third party
container operators have also started to emerge. These companies
are involved in every step of the container business, from booking
of trafc to aggregating and distributing goods to their nal
destination. In addition, these companies have invested over USD
200 million to overhaul old terminals and purchase rail wagons.
Finally, the Ministry of Railways also intends to partner with state
governments and private infrastructure providers to establish
multimodal logistics parks equipped with rail sidings, storage
warehouses and highway connectivity.
4.6.2. Government policy on PPP in dry ports
PPP projects still form a miniscule part of IR though the scope is
immense. In spite of a dire need of funds and technical and
managerial know how, the approach of IR has been overcautious.
One of the reasons for this state of affairs is the absence of a clear
articulation of policy with respect to PPPs. Hence, private partici-
pation has been invited only in areas requiring immediate atten-
tion, by way of funding, or improvements in service quality, or
whenever a government agency has consistently failed to make
adequate use of assets. The legal machinery of the government has
also not gained adequate experience for the enforcement of
contractual discipline by way of legal precedents in this eld.
The government also fears the emergence of private monopolies
in case suitable regulations and safeguards are not instituted.
Having said this, the government does not appear to be overly
concerned with state monopolies, whereas, often, there appears to
be a degree of prejudice against private sector participation and this
would require a change in the mindset of government ofcials.
Arguably, however, historical evidence could not immediately
rebuke such prejudices, for private sector participation in public
monopolies has not always been successful and in some cases it has
also resulted in the feared private monopolies.
It is equally important to develop clear and unambiguous
criteria for monitoring and evaluating PPP projects. Ideally, it would
be wise to build in a suitable periodical audit system, for the
purpose of such evaluations. Such criteria could broadly be divided
in two headings viz; assured revenue stream generation; and
a clear legal framework for the enforcement of contractual stipu-
lations. The private sector is usually unwilling to invest in such
projects, not because the return on capital is inadequate but
because of the uncertainty that shrouds the interpretation of
contractual terms, combined with an inexperienced legal system
that might eventually be called upon to enforce the contract. In
other words, private investors do not always trust the willingness
or ability of the government to adhere to the contractual terms.
5. Conclusions
The role of dry ports in facilitating and developing the inter-
national trade of large countries of bottlenecked seaports is
unquestionable (Haralambides & Londono-Kent, 2004; Har-
alambides et al., 1997). Moreover, by increasingly becoming basic
infrastructure ealbeit with considerable private sector nancial
interests edry ports contribute to economic development; easing
of public funding requirements; introduction of FDI and related
technologies; and the enhancement of competition.
Indian dry ports in particular are characterized by a dominant
public presence eoften not without good cause - which, in spite of
the governments determination to increase private sector
involvement, makes the latter rather difcult; substantial excess
capacity and related limit pricing policies by incumbent dry ports
contribute to this, coupled with a fairly weak legal framework to
ensure mitigation of risk and uncertainty for the private investor.
Successful PPPs and greater involvement of the private sector in
dry port operations would require pricing policies based on long-
run average cost pricing aimed at full cost recovery by public and
private dry port operators alike. This would eventually eliminate
wasteful subsidies and cartelization, and establish a level playing
eld among the public and the private sectors. To achieve this, land
should be made available to interested parties indiscriminately, at
prices reecting its opportunity cost. Moreover, possible govern-
ment guidelines on pricing policies based on full cost recovery will
necessitate the compilation and equitable dissemination of rele-
vant statistics, as well as greater transparency and the adoption of
a standardized accounting system (Haralambides, Verbeke, Musso,
& Benacchio, 2001).
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H. Haralambides, G. Gujar / Research in Transportation Economics 33 (2011) 51e5858
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