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The Indian Port Privatization Model: A Critique

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A case-study of the Indian port privatization model, implemented at Jawaharlal Nehru Port in India.
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THE INDIAN PORT PRIVATIZATION MODEL: A CRITIQUE
Shashi N. Kumar, Ph.D., Master Mariner
Professor and Department Chair, IBL
Loeb-Sullivan School of International Business & Logistics
Maine Maritime Academy
Castine, ME 04420, USA
The author is grateful to Jawaharlal Nehru Port Trust officials for their cooperation and
assistance in writing this paper, and also thanks the Indian Institute of Management,
Ahmedabad, India, for facilitating his visit to the port.
2
INTRODUCTION
India is the world's 10th most industrialized nation. It has a population of close to one billion
people, and a huge affluent domestic market, second in size only to that of the People's Republic
of China. Today, the nation stands poised for unprecedented economic growth, and is receiving
much attention from numerous multinationals and institutional investors.
The transformation of the stagnant Indian economy began in 1991 with the adoption of a
liberalized industrial policy that was introduced by the then Government of India, controlled by
the Congress Party. The present coalition government has continued the momentum towards
economic liberalization. As a result, the gross domestic product has been growing at an average
rate of more than six percent annually. Government-approved foreign investment in the country
has made a sixty-fold quantum leap from 950 projects worth $170 million in 1991 to 2,337
projects worth $10.2 billion in 1995.
1
Today, India is the world's largest producer of fruits and
the second largest producer of vegetables.
Indian exports grew to $32 billion in 1995, a 30 percent increase over the previous three years.
2
Exhibit 1 shows anticipated growth in Indian traffic based on predicted trade growth to the year
2006. The government has a short term plan to increase its exports to $75 billion by the next
millennium.
3
It focuses on increasing exports of 15 identified products to the 15 principal
trading partners of the country. There is a forecast that during the next ten years, Indian trade
with the US--the nation's largest trading partner--alone will increase by 19-23 percent each year.
4
Accordingly, the US/India trade route has become highly lucrative and is presently served by
3
well over 40 carriers.
5
Three top tier container operators--SeaLand, Maersk and Neptune Orient
Lines--have announced the desire to expand their operations in India in anticipation of the
projected trade growth.
6
Although the economic liberalization policy makes Indian products and services theoretically
competitive in the global market, the nation's economic rejuvenation still lags that of other
rapidly growing Asian economies like China, Malaysia and Singapore. One reason for this is that
the nation's port and transport infrastructure is incapable of supporting increased industrial
production. The disparity between the growth rates in India's industrial production (13 percent
p.a. for 1995), exports (18 percent p.a. for 1995) and facilities (less than five percent p.a. for
1995) is a good illustration of the tightening bottleneck.
7
The nation's road, rail and sea transport
system is deficient in many ways and the performance of Indian ports is well below acceptable
international norms.
8
At present, all the Indian ports together have barely 10 dedicated container
berths, 15 quayside cranes and 32 yard gantry cranes.
9
The management system of Indian major
ports in particular has come under scathing criticism of port experts.
10
The inefficiency of
Indian ports results in higher container handling costs and slower ship turnaround times. As a
result, no Indian major port approaches the level of world class container port (see Exhibit 2).
The high vessel-related and cargo-related charges and the general inefficiency in cargo operations
have led to the operators' charging a higher freight rate from India compared to other ports in the
region.
11
Furthermore, because of the uncertainty associated with container movements in Indian
ports in general, the major container operators resist sending their main-line (mother) vessels to
India. Thus, Indian exports and imports are typically carried by feeder vessels through
4
transshipment centers in Colombo, Singapore and Dubai. These additional cargo operations
increase the freight rate and chances of loss and damage besides lengthening the cycle time
considerably, putting Indian products at a competitive disadvantage in the global market.
Overall, the chronic congestion and inefficiency in Indian ports could be the major stumbling
blocks that stifle the nation’s industrial and economic growth
12
and require a paradigm shift in
operational philosophy.
To begin with, all the Indian major ports are operating ports. Paradoxically, as statutory bodies,
their outlook and operational philosophy resemble those of a public authority rather than those of
a vital service-oriented industry. Other problems cited with Indian ports include their physical
configuration and proximity to urban development centers, a multi-tiered bureaucracy that
oscillates between excessive management control on one extreme to management by abdication
at the other, dated port facilities and equipment, absence of equipment maintenance, lack of
coordination of port activities, draft restrictions that preclude the handling of modern container
vessels and a virtual nonchalant attitude towards the changing nature of international trade and
technological advances.
13
In the case of Jawaharlal Nehru Port (JNP), India's most modern port
that became operational only in 1989, mainline vessel calls declined from 58 in 1994 to 18 in
1995. This was reportedly because of the port's poor productivity and also the deviation from
east-west trade route necessary to call JNP.
14
Although the total number of containers handled
during 1995 went up at JNP, that was only because of increased feeder traffic. According to a
recent World Bank report, the hourly container handling rate at JNP of 10-12 is far inferior to the
35, 38 and 69 hourly moves at Colombo, Bangkok and Singapore respectively.
15
While
5
Colombo handles an average of 1,360 TEUs per day and Bangkok 1,280 TEUs, Madras
(Chennai) handles an average of 307 TEUs per day and Bombay (Mumbai) 218 TEUs.
16
THE NEED FOR GREATER EFFICIENCY IN INDIAN PORT OPERATIONS
The poor productivity of Indian ports results in significant congestion in addition to the long
hours spent at the berth. Ships owned by the Shipping Corporation of India (SCI) reportedly
spend 52 percent of their time in ports.
17
The ship turnaround time in Indian ports is between
five to six days while it is barely six to eight hours in comparable other ports in the region. As
the daily port cost of a container ship in Indian ports is in the $15-20,000 range, an Indian port
call results in very high voyage costs. Furthermore, sending the main-line vessels to Indian ports
is a non-option for major operators as the unusually long port stay would jeopardize their tight
schedules and break down the finely tuned supply chains of their customers. Container handling
costs in India are about 80 percent higher than those in Japan and USA where the labor costs are
much higher.
18
The cost of such port inefficiency is ultimately borne by Indian exporters and
consumers. Thus, despite the low labor costs and production economies of Indian manufacturers,
the resulting higher landed costs render their exports non-competitive vis-à-vis those exported
from other more efficient ports.
The demand for container ports in the Indian sub-continent region is forecast to increase from 2.9
million TEUs in 1994 to 8.2 million TEUs in the year 2005 under an assumed optimistic
economic environment. The forecast under assumed pessimistic environment is for 7.2 million
TEUs in 2005. To facilitate the optimistic forecast, the required new craneage alone in the Indian
6
sub-continent is 10 new units in 1995-96, 10 units in 1997-98, 16 in 1999-2000 and 52 in 2001-
2005.
19
Exhibits 3, 4 and 5 show total capacity of major ports by the end of the 8th plan, the port
capacity required in million tonnes for the projected traffic and the additional annual port
capacity required respectively.
How can India provide the necessary container port capacity to meet with such level of
anticipated demand and sustain its economic rejuvenation? The major Indian ports are already
operating beyond their capacity as reported gloriously by the various port trusts. The 12 Indian
major ports collectively handled 213 million metric tonnes of cargo in fiscal 1996 though their
rated capacity was only 179 million metric tonnes.
20
This is truly a reflection of two of the
numerous major problems in Indian port management: one, the estimation of port capacity using
dated labor and equipment performance standards and two, the absence of proactive port capacity
planning by the Indian port bureaucracy. Thus, the exalted claim of Indian major ports of greater
than 100 percent capacity utilization is myopic at best rather than the affirmation of any
extraordinary performance standard. Even in those rare situations where proactive capacity
enhancement planning is undertaken, the gestation period from the planning phase to its actual
implementation is inordinately long because of the lengthy, multi-tiered decision making
involved.
A virtual catharsis of the current port management practices in India alone is expected to increase
the port capacities by 35 percent.
21
There is significant delay in executing projects under the
present highly bureaucratic system where most decisions are ultimately made at the Ministry of
7
Surface Transport (MoST) in New Delhi. It is imperative that Indian port capacity be augmented
and that the private sector with port management expertise be made a partner in the process. A
recent scrutiny of Indian ports emphasized the need to transform the Trust Ports into "landlord
ports" with greater autonomy and increased private sector participation through the strategic
creation of "islands of excellence".
22
The primary benefit of such privatization measures is an
exposure to competition that is unlikely under a state-operated system.
23
Indeed in the context of
Indian ports, their bureaucratic integration through uniform tariff structures and accounting
practices, and other policy measures have led to very little competition of the type experienced
among ports in Europe or North America.
24
Other major advantages of port privatization include
providing an opportunity for a commercial entity with port management expertise to directly
manage the operations as well as the availability of private funding sources.
PORT PRIVATIZATION IN INDIA
There is a general expectation among private and public interests that privatizing some or all
aspects of Indian port operations would solve several problems. This is partly because of the
successful outcomes of port privatization initiatives experienced in other parts of the world.
Another reason for this is the success of the relatively minor port privatization attempts in India
itself. The dedicated berth programs--at Bombay (for American President Lines and Sea-
Consortium) that lasted for a year and Madras (for Bengal Tiger Lines and Sea-Consortium) that
is ongoing--are perceived very successful. In both the above cases, the Port Trusts became
landlord ports with regulatory authority and the carriers effectively ran their terminals and
invested in new equipment. The initiative in Bombay reportedly enhanced efficiency by 90
8
percent during the first six months of operation despite considerable constraints.
25
However,
other attempt at privatization in major Indian ports as Madras, New Mangalore, and Cochin have
been impromptu, haphazard and confusing to say the least.
26
Foreign interests including the US
ambassador to India have referred to vital lacunae in Indian port privatization initiatives such as
"finance and inter-connectivity."
27
A study for the Asian Development Bank identified the
following major frustrations in the context of privatization in India
28
:
the absence of a firm national consensus in favor of privatization that sent conflicting
signals to likely bidders especially from abroad
the suspicion that privatization efforts are pursued primarily to seek funds rather than
in response to policy objectives
privatization efforts often result in a simple transfer of ownership from Government
of India to Government-controlled mutual funds with no firm introduction of market
discipline
limited liberalization of the bureaucratic procedures for clearance and approval of
projects
no intention to alter the antiquated labor laws
The decision by the Indian MoST to privatize port operation has met with resistance from the
Port Trusts themselves and the powerful dockers' unions. The resulting procrastination has led to
several shipping lines referring to Indian port privatization as a joke.
29
In addition to the anti-
privatization stance of various stake-holders, the 1993 guidelines on port privatization issued by
the Indian Government did not provide much enthusiasm for prospective bidders. As per those
9
guidelines, potential operators must adhere to the 1963 Major Port Trusts Act that mandates
government-established tariff ceilings, must guarantee minimum levels of performance, and also
comply with all existing labor laws. The requirement that privatized Indian port operations must
function within the existing labor laws alone is a major detractor for prospective bidders.
Furthermore, the prospective private operators will not receive any special tax benefits for
investments within the port. On the whole, initial attempts at port privatization in India were
ambiguous, frustrating and devoid of commercial principles.
30
PRIVATIZATION AT JNP
As the most modern major port in India and also the port with the fewest labor-related hurdles,
JNP was the natural choice as a test case in Indian Major Port privatization effort. Furthermore,
in 1992, the P&O Ports Australia Pvt. Ltd., along with their Indian partner the RPG Group,
openly expressed their interest in managing the JNP container terminal. In 1993, the
Government of India requested the World Bank for a team of international experts to do the
necessary groundwork for the tendering for operation of the JNP container terminal. The
expectation was that the expertise gained from this experience would serve as a launching pad in
the much wider and far more complex privatization efforts at the other major ports.
31
The Group
of Experts appointed by the World Bank submitted their recommendations--General Notice
Inviting Bids for Licensing the Operations of Port Terminals--to the MoST and the Ministry of
Justice in January 1994.
10
In compliance with Section 42 of the Major Port Trusts Act, the Experts proposed to license the
management, operation and maintenance of the container terminal for a period of ten years. The
licensee would purchase all equipment owned by JNPT, and invest in container handling
equipment and spare parts as needed. The licensee would operate the terminal on common-user
basis, and hand over the terminal and all equipment and additional facilities to the licenser on
expiration of the license. The labor issue was to be dealt with by giving an option to existing
JNPT employees to join the new firm at terms and conditions not inferior to what was available
with their JNPT employment. The licensee would be responsible for the maintenance of all
facilities on the terminal except fire, waterside and dockside safety aspects. JNPT would be
responsible for berthing, pilotage, towage, maintenance of the general port infrastructure, fire
safety, waterside and dockside safety, inland access to the port, and the supply of electrical power
and water. Licensee would guarantee minimum performance levels and bill terminal users at
rates not exceeding the tariff schedule set by the MoST for JNP. Penalty clauses were specified
in case of not meeting the guaranteed performance levels. The licensee would also meet all legal
and fiscal obligations, and pay all taxes. The experts also developed a detailed set of criteria for
the evaluation of the financial bid as well as the technical bid that were to be released to the
bidders.
In the meantime, the need for an additional container terminal became rather obvious. Thus, the
scope of the privatization plan was widened to include the building and operating of a new
container terminal in addition to the privatization of the existing terminal. The global tender was
initially planned for early 1994. However this date was postponed several times, often-times for
political reasons and at other times, sheer mistrust of the whole privatization concept.
11
Meanwhile, productivity at the existing JNP container terminal began to improve slowly as the
various teething problems were solved (see Exhibits 6, 7, 8, 9, 10, 11 and 12). Simultaneously,
there was a ministerial change that resulted in the appointment of an ideologically pro-labor
Minister of Surface Transport. The new minister, Rajasekara Murthy, did not favor privatizing
the existing container terminal as that could jeopardize the fate of existing JNP labor. Thus, it
was decided to privatize only the new container terminal. The JNPT Port Planning and
Development Department carefully prepared an extensive final bid document in consultation
with the MoST and other ministries. The port issued a global tender "Notice Inviting Global
Bids" for a new container terminal on "build, operate, transfer" basis for thirty years in December
1995. The bid document was on sale from December 26, 1995, to February 15, 1996, and
specified the qualifying criteria for responding to the bid invitation (see Exhibit 13). Thirty
firms from India and abroad purchased the bid document at a price of Indian Rupees (Rs.) 20,000
(US $564 approximately) per copy.
Details of the Bid for A New, Privatized JNP Container Terminal
As per the bid document, the licensee would construct, manage, operate and maintain a new
state-of-the-art two-berth container terminal at JNP subject to the conditions specified in the bid
document and subject further to section 42 of the Major Port Trusts Act, 1963. This will include
constructing a 600 meter long quay and developing a new container yard measuring 20 hectares
all of which is to be reclaimed from the sea. The ownership of all the land, reclaimed area and
12
water area in the licensed premises would always remain with JNPT. On the expiration of the
stipulated license period, all the civil engineering structures, all equipment, machinery,
ancillaries, etc., would be handed over to JNPT. If JNPT were to terminate the agreement prior
to the thirty year period, the licensee would receive the depreciated cost of permanent
construction and other assets as taken over. The document specified the life span of the assets
for estimating depreciation.
32
The licensee will also invest in the following minimum container
handling equipments:
6 rail-mounted quay cranes (RMQC) of which at least two shall be post-Panamax
size
15 rubber tyred gantry cranes (RTGC) for container yard operations
3 rail-mounted gantry cranes (RMGC) for railway yard operations.
The licensee will make necessary arrangements for warehousing facilities for the new terminal
either through another agency or by developing its own container freight station. The port has set
aside twenty hectares of land for this purpose that could be leased by the licensee. The licensee
would manage, operate and maintain the facilities licensed on a common-user basis and refrain
from any unfair or discriminatory practice against any user of the terminal or persons desiring to
avail of the services offered by the terminal.
The port, on its part, will provide the licensee with six hectares of additional developed container
yard area. The port will also make available a fully developed railway yard of two hectares of
13
paved area for inland container depot operations of the licensee. JNPT will be responsible for
providing the following services
33
:
scheduling entry and berthing of the vessels in consultation with the licensee
pilotage and towage
maintenance of the entrance draft of 10.7 meters
provision and maintenance of all general port infrastructures other than those covered
under the license for management, operation and maintenance of the container
terminal
maintenance of the dredged draft alongside berths at the container terminal of 12.0
meters tidal entry and 12.5 meters tidal exit
waterside safety and safety of navigation
coordinating and overseeing the dock-side safety and implementation by the licensee
of all orders and directions of various authorities from time to time
supply of electrical power as available subject to payment by the licensee at rates to
be prescribed by JNPT from time to time
water supply to terminal and ships as available subject to payment by the licensee at
rates to be prescribed by JNPT from time to time
monitoring of pollution in the Air and Water, and ensuring compliance of
Environmental Protection Measures by the licensee in the licensed premises at the
expense of the licensee
14
With regard to pricing, the licensee would collect prescribed rates and charges, not exceeding the
maximum rates published in the JNPT Port Tariff Schedule and Scale of Rates as approved by
the Government of India. The port anticipates 20-25 percent increase in tariff every three years,
with the next revision of tariffs expected in early 1997. The licensee would bill the users of the
container terminal for services, including terminal charges, container handling and cargo related
charges.
Table 1. Guaranteed Throughput at the Privatized JNP Terminal
YEAR Total TEUs (Import, Export &
Transshipment)
1st Year of Operation 150,000
2nd Year of Operation 200,000
3rd Year of Operation 260,000
4th Year of Operation 330,000
5th Year of Operation 410,000
6th Year of Operation and onwards 500,000
Source: JNPT Bid Document p.53
As per the bid document, the successful bidder would guarantee handling at least 90 percent of
the projected annual throughput levels given in Table 1. The licensee is liable to pay a royalty
for the guaranteed traffic in the event of not achieving the minimum traffic indicated unless the
failure is attributed to factors outside the licensee's control. The bid document also specifies a
gross average productivity of quay cranes of not less than 20 moves per hour per crane every
month. If the licensee fails to achieve the guaranteed throughput for two consecutive years, the
15
license would be considered in default. After signing the license agreement but prior to the
commencement of construction, the licensee is to submit a performance bond for an amount of
Rs. ten crore ($10 million) (in favor of JNPT) of two reputable surety companies or bank or
banks (liable jointly and severally) acceptable to JNPT. The bond is to be kept renewed for a
period of one year until after completion of the contract period or license and for one full year
thereafter. JNPT would be entitled to enforce the liability of the licensee on the performance
bond. The bond is to be supported by an irrevocable bank guarantee, from Bombay branch of a
nationalized bank of India, in favor of JNPT, for a sum of Rs. ten crore ($10 million). Exhibit 14
provides an extract of other specifications in the bid document.
A pre-bid conference that included clarification of the bid terms and a visit to JNP was held on
March 14 and 15, 1996. Potential bidders raised several queries during the conference to which
the port responded. The date for submission of bids, originally scheduled for April 19, 1996, was
extended to August 16, 1996, because of national elections. On that day, JNPT received bids
from five consortia consisting of both Indian and foreign firms. Each consortium submitted the
requisite Rs. 10 million earnest money deposit along with its bid. The following is a listing of
the five consortia and their constituents:
A consortium led by Hutchinson International Port Holding Ltd., Hong Kong
consisting of Hutchinson International Port Holding Ltd., ABG Heavy Industries Ltd.,
and Bank of America International Investment Corporation
A consortium led by Marubeni Corporation, Japan consisting of Marubeni
Corporation, Evergreen International and ILFS, Bombay
16
A consortium led by P&O Ports Australia Pvt. Ltd. consisting of P&O Ports Australia
Pvt. Ltd., DBC Port Management, and Konsortium Perkapalan Berhad
A consortium led by the Port of Singapore Authority consisting of the Port of
Singapore Authority, Samsung Corporation, Seletar Investment, Neptune Orient Lines
Ltd., and Samrat Shipping
A consortium led by Stevedoring Services of America International Inc., USA
consisting of Stevedoring Services of America International Inc., Larsen and Toubro
Ltd., and Precious Shipping Ltd., Thailand.
As per the bid document, all consortia submitted their financial bid separately from their
technical bid. The financial bids were sealed and deposited in the safe custody of State Bank of
India, to be opened only after the technical proposals were fully evaluated. The JNP Board of
Trustees set up an Evaluation Committee for evaluating the bids. The Committee was headed by
the JNPT Chair and included six members that consisted of the four JNP Departmental Heads
and one expert each from the ports of New Mangalore and Madras. The Committee scrutinized
the technical bids received and sought clarifications where needed from the various consortia.
The clarification meetings were held on November 4 and 5, 1996. The Evaluation Committee
concluded that the technical proposals of four consortia were responsive, qualified and
acceptable. The bid from the consortia led by Stevedoring Services of America International was
found non-responsive because of the inclusion of a conditional financial proposal in violation of
bid guidelines. The JNP Board of Trustees approved the recommendations of the Evaluation
17
Committee on November 30, 1996. The four responsive consortia bidders were informed that
their financial bids would be opened on December 10, 1996, and the other consortium was
informed of the non-responsiveness of its bid. Accordingly, the four financial bids were opened
and scrutinized by the Evaluation Committee. The bid Net Present Values (NPV) are ranked
below in descending order:
Rank 1: The consortium led by P&O Ports Australia Pvt. Ltd., Sydney
NPV: Rs. 224.59 crore ($74 million)
Rank 2: The consortium led by Hutchinson International Port Holding Ltd., Hong Kong
NPV: Rs. 163.61 crore ($54 million)
Rank 3: The consortium led by the Port of Singapore Authority, Singapore
NPV: Rs. 133.44 crore ($44 million)
Rank 4: The consortium led by Marubeni Corporation, Japan
NPV: Rs. 120.28 crore ($40 million)
On the very same day, the rejected consortium filed a writ petition against the JNPT decision in
Bombay High Court. Thus, JNPT received a court order to not finalize the outcome of the bid
process until hearings could be held. The High Court held its hearings on the writ petition on
December 11, 18 and 19, 1996 and rendered a final decision in favor of JNPT. As per the bid
document, JNPT invited the consortium led by P&O Ports Australia Pvt. Ltd. for further
negotiations that were held on January 1 and 6, 1997. During the negotiations, the winning
consortium agreed to raise the minimum guaranteed throughput from 550,000 to 600,000 TEUs
per annum from the 15th year of awarding the license. As a result, NPV of the consortium's bid
18
went up to Rs. 235.4 crore ($78 million) and JNPT's gross revenue during the 30 year license
period would exceed Rs. 4,000 crore ($1,320 million). The consortium also agreed to construct
an additional approach bridge on the southern extension at a cost of $1.5 to 2 million.
On January 10, 1997, the Evaluation Committee reported their findings to the JNP Board of
Trustees and recommended granting the license to the consortium led by P&O Ports Australia
Pvt. Ltd. The Board of Trustees accepted the recommendation that was then sent to the MoST
for its approval. On January 27, 1997, the MoST gave its approval for the project and the port
issued a letter of intent to award the license to the winning consortium on February 3, 1997.
Now, the consortium has to register its company under the 1956 Indian Companies Act, get the
clearance from Foreign Investment Promotion Board and also furnish the requisite performance
guarantees. On successful completion of these procedures, a formal license agreement will be
signed between the JNPT and the winning consortium. It is expected that these formalities will
be completed shortly and the construction work will commence well before the 1997 monsoon
season.
34
The successful bidder hopes to have the terminal partly operational by the end of the
second year of receiving the license, and fully operational a year later.
Future Privatization Plans at JNP
By the turn of the century, with the new terminal in almost fully operational status, JNP is
expected to join the elite group of terminals that handle a million TEUs or more per annum. The
bid conditions do not permit JNP to consider further development of container handling facilities
until the new terminal reaches 90 percent of its designed capacity. Now that JNPT has joined
19
the privatization bandwagon, it is also considering the following new ventures through private
partnership:
Development of an integrated marine chemical terminal on BOT (Build, Operate and
Transfer) basis through global tenders for handling all grades of chemicals including
refrigerated liquefied gases and pressurized liquefied gases at an estimated investment
of Rs. 1,750 crore ($500 million)
Construction of a 300 meter long liquid cargo berth, capacity 5.5 to 6 million tonnes
per annum
Building six additional berths for handling agricultural products, ores, steel scrap,
sponge iron and also a multipurpose berth on BOT (Build, Operate and Transfer)
basis through global tenders at an estimated cost of Rs. 1,225 crore ($350 million)
Other expansion plans for the future include:
Developing the ecology and recreational facilities, including a five star hotel and a
golf course at an estimated cost of Rs. 165 crore ($55 million)
Developing an Export Processing Zone
Setting up a floating dry-dock for repair of ships up to 45,000 dwt at an estimated cost
of Rs. 260 crore ($ 75 million)
Developing an inland ro-ro facility for interconnecting different industrial nodes along
the coast at an estimated cost of Rs.150 crore ($45 million)
20
Developing private container freight stations and cold storage facilities for
import/export cargo at an estimated cost of Rs. 500 crore ($160 million)
Developing infrastructure facilities for repairs of containers, mobile equipment, etc.
The port expects to reach annual cargo handling rate of 25 million tonnes by the turn of the
century and double it in another decade. The building and operation of the new container
terminal in JNP through private interests will bring about a certain level of maturity in the
management of port container operations that has hitherto lacked in India. The policy-makers
have added momentum to the process by approving a proposal to corporatize JNP and also
Ennore, a satellite port off Madras in Southern India.
35
OUTCOMES ASSESSMENT
The progression towards running a privately operated container terminal in any Indian port is an
exceptional accomplishment by Indian standards. After years of deliberation and bureaucratic
interference, the Indian port sector has accomplished a major psychological breakthrough. What
is even more noteworthy is the fact that the whole process was truly transparent, very non-
controversial and completed almost on time. All the same, there are some aspects of the bidding
process and Indian port planning that need fine tuning and are discussed next.
21
As per the present plan, the port will continue its regulatory role under the original Major Port
Trusts Act of 1963. However, a new independent tariff regulatory authority will fix and regulate
port tariffs. The tariff authority will be chaired by a past or present senior Government
bureaucrat with port experience and will also include an economist and a finance specialist, both
with at least fifteen years' relevant experience. Port and terminal operators must not exceed the
ceiling tariffs established by the new body. The Government of India feels this is essential to
increase transparency and provide a level playing field for investors.
36
However, from the
private operator’s perspective, this is rather discouraging and indicative of continued bureaucratic
meddling. If private interests are allowed to build and operate a terminal, there is no reason to
preclude them from pricing commercially. If indeed a governmental body is to be the ultimate
arbiter of port tariffs, why is it that they should set the ceiling tariff alone? Would not a tariff
with a zone of rate-making freedom on either side be more conducive for entrepreneurs? This
particular aspect of continued bureaucratic interference needs immediate attention.
Mutuality of obligations is another area where one would like to see some improvements. Some
of the present bid requirements are likely to result in frustrations sooner or later. For example,
the shortage of electric power is a major problem in India. The bid document stipulates that the
Port Trust (licenser) will supply electrical power as available subject to payment by the licensee
at rates to be prescribed by JNPT from time to time.
37
There is no mention of any recourse for
the private operator if the port authority fails to supply power and port operations are hampered.
The issue of performance guarantee is also controversial and unpopular with private interests.
They cannot help but compare their situation with fellow entrepreneurs in the power sector. In
22
this sector that is also being privatized presently in India, the State Electricity Boards are the ones
who guarantee consumption of power for a certain number of years. Accordingly, entrepreneurs
make their investment in a power plant. The current guidelines for investment in the port sector
are in sharp contrast. An entrepreneur in the Indian port sector must not only make the
investment but also guarantee a certain level of throughput during the lease period. This is not
particularly attractive for an investor choosing between an investment in the port sector vis-à-vis
one in the electrical power sector. The bid document specifies clear and succinct qualifying
criteria for responding to the JNPT bid invitation (see Exhibit 11). This should be sufficient to
keep off the fly-by-night operators and speculators. Established port operators will not invest in
a new facility without doing their homework. If indeed they are chosen for their expertise in port
operations and management, why not have them guarantee a royalty per container, or per tonne of
cargo handled, rather than a fixed number of containers per year?
The privatization guidelines issued by the Government of India stipulates that at the end of the
BOT (Build, Operate and Transfer) period, all assets will revert to the port free of cost.
38
The
JNPT bid document complies fully with this provision. However, what incentive is there for an
operator nearing the end of the BOT period to maintain all the equipment and hand them over in
anything more than barely working conditions? At this juncture, the room for litigation appears
very broad and inviting. Future bid documents should clarify this particular aspect so that there
is less ambiguity. Furthermore, lenders would also want clarification as to who owns these assets
during the BOT period prior to issuing loans.
23
One interesting aspect of the JNP BOT outcome is that a private terminal will be in operation
right next to the present terminal operated by the Port Trust. Much as it has the advantage of
enhancing the performance in the present terminal through an osmosis of better practices and
efficiency, the possibility of the reverse also should not be ignored. It will be truly engaging to
watch who is going to influence whom. The problem is certainly far deeper and goes right back
to the Major Port Trusts Act of 1963, adopted well before containerization in India, and also
unsolved issues related to the highly militant Indian dock labor.
The two issues discussed next are more important from a long-run strategic perspective of all
Indian ports in general. As the new terminal becomes operational, JNP’s position as India’s
premier container port will be well established. It may indeed cross the one million TEUs per
annum benchmark by the turn of the century and enter the lower echelons of top tier container
ports. But, how attractive will be a container port with 10.7 meters of entrance draft and 12 to
12.5 meters of draft alongside for today’s major container operators? None of their latest
generation of vessels will still call at JNP or other Indian ports for that matter. The best that JNP
can attract is a vessel carrying around 4,000 TEUs which means that ports like Colombo, Dubai
and Singapore will still remain as gateways to India. Thus, despite the immense volumes of
cargo generated by a rapidly growing Indian economy, the nation's ports do not seem headed for
the coveted load center status, and are still destined to be served primarily by feeder vessels.
The Indian privatization guidelines expressly states that ports should ensure that private
investment does not result in the creation of private monopolies.
39
However, the recent string of
24
successes of the P&O Ports Australia Group must be troubling to even the least skeptical
observer. It is a subsidiary of the British P&O, best known for its shipping line that recently
merged with Nedlloyd to form one of the biggest container operators in the world. The
worldwide operation of P&O Ports is controlled from Sydney, Australia and presently owns
partly or fully and/or manages 53 ports in 16 countries. Its current projects in South/ South East
Asia include:
Port Qasim Container Terminal in Pakistan, the first dedicated container terminal in
that nation
the Laem Chabang International Terminal Co. in Thailand
the South East Asia Gateway Terminals Ltd. at Colombo in Sri Lanka.
These are in addition to the JNP project in Bombay and the recently awarded billion dollars
Vadhavan port project in Maharashtra. It appears that the group will virtually drain all the
subcontinent cargo to perhaps Colombo, making it a world class load center and ensuring the
feeder port status of Indian ports. Once the technical bid is accepted, should NPV be the sole
criteria in awarding the BOT port projects? What about an overall vision, and scope for
competition in future years with neighboring ports for load center status? Presently, this appears
to be lacking despite the centralized nature of Indian port planning and development.
CONCLUSION
25
India today stands poised for unprecedented economic growth. However, inadequate port and
transport infrastructure pose a significant bottleneck to its trade potential and growth plans.
Numerous studies by experts have recommended private involvement and professional
management in Indian port operations. After many false starts in some Indian major ports, the
attempt to create a privately owned and operated container terminal has at last come to a financial
closure at Jawaharlal Nehru Port, Nhava Sheva and the port itself is being corporatized. The JNP
officials ought to be credited for the transparent and timely way in which they went about
awarding the contract that may indeed become a model for similar projects in India as well as
other developing countries. However, there are several aspects of the Indian port privatization
model that need fine tuning before it becomes ideal for emulation by others. These include
strategic long term policy issues as well as tactical mundane issues such as power and water
supply to the private terminal operator. The paper recommends an expanded role for market
forces and a diminution if not the total elimination of the newly created tariff regulatory body.
The government has a role in ensuring that no private terminal operator monopolizes the
subcontinent’s container trade. It would be far better for the government to use its scarce
resources for this purpose rather than in traditional regulatory activities like price control.
Despite the recent initiative at JNP, India’s premier container port, it is unlikely that that would
propel it into the top tier of world class container ports. Present port planning in India still lacks
the vision to create an indigenous gateway port despite having a definite need for it. The nation’s
container traffic would thus continue to transit through Colombo, Singapore and Dubai or other
Arabian Gulf ports. However, none of these should undermine what has been accomplished at
JNP. The involvement of a private operator to run its new state-of-the-art container terminal is
26
epoch-making by any measure, and amounts to a psychological breakthrough in the nation's port
planning, development and operations. While the Indian bureaucracy is far from elimination, this
may indeed be the first step of a new awakening in Indian ports, a subdued clarion call for change
and efficiency.
ENDNOTES
1
"India: Poised for Growth," Market Survey, World Trade Oct. 1996; p.74.
2
J. Shaw, "Quantum Leap: Can India Overcome Its Infrastructure Hurdle and Become A Major
Global Player?" World Trade Oct. 1996; p.58.
3
V.N. Rao, "India Targets US, 14 Others in Trade Drive," Journal of Commerce 29 Dec.,
1995; p.3A.
4
T. Brennan, "Carriers Boost Container Services in India, Trade Growth Seen in Double Digits
for Decade," Traffic World 18 Mar., 1996; p.42.
5
A. Bascombe, "A Sexy Trade...," Containerization International Apr. 1995; p.55.
6
T. Brennan, p.42.
7
"Majors Spurn Indian Ports: Poor Productivity Hinders Growth," Fairplay 14 Mar., 1996;
p.16.
8
K. Balasubramaniam, "India's Long Road," Containerization International Feb. 1994; p. 63-
65.
9
K. Balasubramaniam, "Indian Port Paradox," Containerization International May 1997; p. 71.
10
India Port Modernization Study (World Bank Report), (Washington, DC: World Bank, 1993).
11
K. Balasubramaniam, p.65.
12
B. Jaques, “Unleashing A Giant,” Seatrade Review Feb. 1997; p.7.
13
G. De Monie, "The Problems Faced by Indian Ports Today," Maritime Policy and Management
22 No.3, Indian Port Privatization Special Edition, (1995), 235.
27
14
"Majors Spurn Indian Ports: Poor Productivity Hinders Growth," Fairplay 14 Mar., 1996;
p.16.
15
"Indian Port Inefficiency Calculated," Fairplay 26 Sept. 1996; p.18.
16
"Indian Port Inefficiency Calculated," p.18.
17
K. Balasubramaniam, p.65.
18
"India: Asia in 1996," Lloyd's Maritime Asia Jan. 1996; p.12.
19
T. Carding, "India's Ports Flourish," Intermodal Shipping Nov. 1996; p.29.
20
V.N. Rao, "Time Not On Bombay's Side," Journal of Commerce 21 Aug. 1996; p.5B.
21
V. Raghuvanshi, "India: Asia in 1996," Lloyd's Maritime Asia Jan. 1996; p.12.
22
G. De Monie, "Restructuring the Indian Ports System," Maritime Policy and Management
22, No.3, Indian Port Privatization Special Edition, (1995), 255-60.
23
F.J. Smith, "The Latest Success Ideas," Worldwide Shipping Sept. 1993; p.52.
24
S. Farrell, "The Economic Context," Maritime Policy and Management 22 No.3, (1995),
233.
25
A. Bascombe, "The Waiting Game," Containerization International Apr. 1995; p.89.
26
J. Sarbh, "Infrastructure: Vision 2000," Presentation at Hotel Taj Mahal, Bombay, 10 Jan.
1997.
27
V.N. Rao, "India Vows to Revamp Port Privatization Program," Journal of Commerce 15
Mar. 1996; p.1B.
28
TecnEcon, Policy Reforms in the Indian Ports and Shipping Sector (ADB Report 1993),
(Inception Report), A Study for the Asian Development Bank/Govt. of India Ministry
of Surface Transport, (London: TecnEcon, Aug. 1993), Section 5, p.4-5.
29
A. Bascombe, p.89.
28
30
A. Joshi, "Foreword." Maritime Policy and Management 22 No.3, Indian Port Privatization
Special Edition (1995); 227.
31
G. De Monie, p.258.
32
JNPT Bid Document, p.42-43.
33
JNPT Bid Document, p. 47-48.
34
"JNPT Opening Up Infrastructure Sector for Private Sector Participation," Indian Shipping
and Transport News, 3 Feb. 1997; p.1.
35
M.C. Gogol, “CoS Clears Corporatization of JNPT, Ennore Port,” Economic Times
17 Apr. 1997; p.4.
36
P. Jain, "Policy Initiatives by Central Government in Major Ports," CII Conference on Ports
and Roads Investment, Hotel Oberoi, New Delhi, 11 Mar. 1997; p.10.
37
JNPT Bid Document, p.48.
38
Government of India, Ministry of Surface Transport, Guidelines to be Followed by Major
Port Trusts for Private Sector Participation in the Major Ports, (New Delhi: MoST,
1996), p.5.
39
Government of India, Guidelines to be Followed by Major Port Trusts for Private Sector
Participation in the Major Ports, p.2.
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India Targets US, 14 Others in Trade Drive
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V.N. Rao, "India Targets US, 14 Others in Trade Drive," Journal of Commerce 29 Dec., 1995; p.3A.
Carriers Boost Container Services in India, Trade Growth Seen in Double Digits for Decade
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T. Brennan, "Carriers Boost Container Services in India, Trade Growth Seen in Double Digits for Decade," Traffic World 18 Mar., 1996; p.42.
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T. Carding, "India's Ports Flourish," Intermodal Shipping Nov. 1996; p.29.
Time Not On Bombay's Side
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V.N. Rao, "Time Not On Bombay's Side," Journal of Commerce 21 Aug. 1996; p.5B.
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