quant container port sector view

7/31/2019 Quant Container Port Sector View

1/19

quant partnerships

April, 2012

Indian Container Port Sector

Author: Jaffrey Thomas

Assisted by: Rohit Ahuja

Guide: Manish Puri


2/19

quant partnerships Working Draft. For Discussion Only

Cargo at Indian Ports

Kolkata

Vizag

Chennai

Tuticorin

Cochin

JNPTMumbai

Mundra

Kandla

Pipavav

North-West

East

South

53%

19%

18%

22%

57%

5%

23%

45%

19%

Container

Dry Bulk

Liquid Bulk

Others

16%

13%

11%

38%

33%

15%

14%

FY11 contribution

Liquid Bulk

Dry Bulk

Container

Others

While coal and fertiliser volumes are

spread across India, iron ore volumes are

concentrated in the East

Others comprises project cargo and

non-containerised unitised cargo. Share

of this segment is decreasing due to

containerisation of unitised cargo

Container volumes comprise of unitised

cargo (bagged, palletised, bundled etc.)

and is concentrated in the North-West

and Southern regions

Liquid bulk volumes are concentrated in

the North-West region due to the

presence of refineries, exploration

facilities and pipeline infrastructure


3/19

quant partnerships Working Draft. For Discussion Only 3

The cost, efficiency and safety benefits of containers across multimodal transport

have changed global shipping norms since the 1960s. This change required

significant new investment in ports, ships and handling equipments, but the

benefits were sufficient to drive the change.

Container Throughput per GDP at constant prices

The increasing container penetration in India is explained by the global growth in

containerised trade, and an increasing transition towards finished and semi-

finished goods in Indias trade basket.

Container Penetration

Central Government policies have tended to favour a higher private sector participation in container terminals as compared to bulk terminals driven by :

Containerisable cargo is more likely to be handled at common-user terminals compared to bulk cargo, which is often handled at captive terminals. This in turn has

enabled greater participation of developers / operators in the privatisation process for container infrastructure, as opposed to a greater end-user driven

participation in the bulk space

The need for capital and the technical competence to handle this increasing penetration of containerised trade

100

250

400

550

700

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Indices for global container, tanker and dry bulk volumes

Tanker Five Major Bulks Container

Year Ratio

2010 1.8

2005 1.5

2000 1.2

1995 1.0

1.0 2.0


4/19


The regulatory framework at central ports results in poor project development and a tariff structure that penalises efficiency gains

4

India has 13 Central Ports commonly referred to as Major Ports.

The Central Ports are managed by their respective Port Trusts under the

jurisdiction of the Ministry of Shipping, Government of India. The tariff charged

by various facility and service providers at these Ports is regulated by the Tariff

Authority for Major Ports (TAMP).

Tariff Computation

Regulatory Framework at Central Ports

Landlord Model Port Trust as landlord owns and retains land and

maritime infrastructure

Private entities develop superstructure and provide

equipments and services

Selection

Criteria

After technical qualification, bidders selected based on

the highest net present value of committed royalty

payments

Policy later revised such that bidders selected based on

the highest quoted share of revenue offered to the

respective Port Trust

Project

Development

Responsibility of the Port Trust as landlord

Tariff Regulation TAMP provides tariff ceiling with jurisdiction over all

Major Ports and private terminals at Major Ports Appeal against TAMP is to High Court, but Union

Government can modify a TAMP order or issue policy

directions on matters related to port pricing

Capital Cost

Return on

Capital

Operating Cost

(excl revenue share)

Recoverable Return

Surplus Return from

previous period

Lower Revenue

requirement

Traffic

Projection

Lower Allowable

Tariff Ceiling

+

-

=

Lower Operating

Cost than projected

Higher traffic than

projected

orHigher revenue collection

than projected


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The regulatory framework at state ports offers flexibility but also transfers all project risks to the private players

5

India has 187 State Ports commonly referred to as Minor or Non-Major Ports.

Only 139 of these ports are currently operational.

Gujarat, Andhra Pradesh and Tamil Nadu have significant private participation in

the port sector. While most of these states have adopted a different PPP

framework for infrastructure development, none of the states control the tariff

charged by private entities.

State governments have undertaken Port development on PPP basis, instead of

the Central government model of terminal development.

Regulatory Framework at State Ports

Gujarat

Maritime Board created in 1982

Port Policy announced in 1995 for creating a market driven port sector

BOOT Policy in 1997 minimum role of state in development; operational

flexibility with tariff freedom; maximum concession; adequate compensation on

project transfer

GIDB Act 1999 single window framework; global bidding; state partnership in

initial stage development; sub-concession and add-on projects

Bidders selected on the basis of highest quoted royalty per metric tonne of cargo

with a fixed escalation of 20% every 3 years over a 30 year concession period

Andhra Pradesh

BOST 30 year concession extendable by two periods of ten years each

Freedom to fix tariff

Government land to be leased. In case of acquired land, cost to be borne by

developer but adjusted against revenue share

30 Km exclusivity in terms of right of first offer and refusal

Suo-moto proposals for development of any Port project or Port facility to be

entertained subject to treatment of the proposals under Swiss challenge

Private bidder selected based on the guaranteed revenue share (50%), percentage

revenue share offered (30%) and investment in Phase I (20%)

Tamil Nadu

Tamil Nadu Maritime Board performs both regulatory & development roles

BOOST - 30 years concession, extendable in case of high capital expenditure

Freedom to fix tariff only til l a regulatory body for the purpose is setup

Expenditure for development of new roads leading to the port will be shared

equally between the developer and state government

The state has seventeen captive ports primarily planned along with coastal based

power plants

One of the captive ports Kattupalli has been given permission to handle

commercial cargo and is currently developing a container handling facility


6/19


State ports are gaining market share due to capacity constraints at central ports

6

Demand Evolution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

JNPT South India Gujarat Others

The growth of JNPT

With NSICT operational in 2000, the efficiencies of a private

container terminal attracted direct vessel calls

In its first year of operations itself, vessel turnaround at NSICT

was 21 hours, compared to 37 hours at the public terminal at

JNPCT and 145 hours at Chennai Port

Subcontinent volumes that were served by transhipment ports

such as Colombo began to be served through direct calls at JNPT

Mundra & South India

With private sector efficiencies at Tuticorin

and Chennai, Southern terminals attracted

direct vessel calls

Growth at South Indias container terminals

halted due to TAMP related issues at Tuticorin

and severe evacuation bottlenecks at Chennai

With congestion at JNPT, Mundra developed

as an alternate for North and West India cargo

Growth at Gujarat Ports

Capacity constraints at JNPT

have resulted in growth at

Gujarat Ports

With no capacity addition at

JNPT at least for another three

years, growth at Gujarats Ports

will continue


7/19


Poor planning has led to development of inefficient berth capacity and sup-optimal capital deployment

7

Supply Development

1995 1996 1997 1998 1999 2000 2001 2002 20092003 2004 2005 2006 2007 2008 2010 2011

0.75

1.5

0.93

2.21

1.04

0.55

1.58

1.78

Start

1.84

1.50

1.36

2.15

1.58

3.0

6.0

9.0

12.0

15.0

18.0

21.0

MillionTEU

Note: Terminal capacities are estimated on the basis of commissioned berth length & draft

All values in million TEU

Year of Commissioning

XX Terminal Capacity

Chennai - I

Cochin

Chennai II

Tuticorin

&

NSICT

Mundra I&

Vizag

Pipavav

&

Kolkata

Kandla

&

GTI

Mundra - II

Capacity realisation will be

severely impacted by container

evacuation issues at Chennai Port

Region Demand Supply Remarks

North-

West

6.3 10.4 Capacity at JNPT, Mundra and Pipavav is adequate.

Kandla has berth capacity without adequate

hinterland ecosystem. Additional 6.8 million TEU

has been concessioned at JNPT and Mumbai Ports.

South 2.5 7.8 Capacity throughout the region is sub-optimally

utilised. Chennai has limited evacuation capacity

leading to low utilization of berth capacity. Tuticorin

has low utilization owing to tariff related issues and

Cochin has limited ecosystem.Additional 5.5 million

TEU has been concesioned at Ennore and Cochin.

East 0.5 0.6 Any further growth in containerised volumes will

lead to volumes getting diverted to Visakhapatnam.


8/19


Future choice of port will be driven by hinterland connectivity and ecosystem rather than port terminal performance

8

Analysis

Kolkata

Vizag

Chennai

Tuticorin

Cochin

JNPTMumbai

Mundra

Kandla

Pipavav

North-West

East

South

Poor planning and bid process management has led to

JNPT losing its dominance in the North-West region

In the North-West region key challenge will beensuring hinterland rail and road capacity

A shortfall in the capacity of hinterland connectivity

will impact overall external trade of the country

Till FY17, cargo from the North-West region will

increasingly move to Mundra and Pipavav

As direct calls migrate to Gujarat terminals and cargo

ecosystems develop, JNPT will be unable to regain

market share even when capacity is available

Beyond FY17, provided the DFC is available, terminalsat Mundra and Pipavav on the one hand, and JNPT

along with Hazira, will experience similar growth

Investments in the Southern region have resulted in sub-optimal

capacity creation. This will severely impact the returns generated by

these investments

Focus must be on developing an adequate CFS ecosystem along with

evacuation infrastructure at ports

Considering the evacuation constraints at Chennai and the surplus

capacity in the region, Chennai port is expected to lose significant

market share to Vizag and other ports in Tamil Nadu

With increasing direct calls at Visakhapatnam and the

terminal reaching critical mass, volumes from Central India

and AP are expected to shift to Vizag

Growth at Vizag will require congestion-free rail connectivityand development of an ecosystem constituting warehouses,

traders, container freight stations and shipping lines

Potential for development of a container terminal exists in

the Eastern region

Riverine ports will be unable to meet the growing demand

If new capacity is not created at seaports in the Eastern

region, the cargo will move to terminals in Andhra Pradesh


9/19


Project Specific Risks

An investor friendly environment can be created if short term development risks and long term regulatory risks are addressed.

9

Risks & Considerations

Central Ports

Available hinterland connectivity

Cost and availability of land for development of CFS and warehousing ecosystem

Upcoming state ports

Other planned terminals at same port

State Ports

Availability of land for port development

Environmental clearance

Social / political opposition to project

Last mile road and rail connectivity

Engineering feasibility of project

Geotechnical &

Oceanography

studies

EnvironmentalClearance

Land Acquisition

Development Implementation Ramp Up Steady Operations

Design &

Engineering

Financial

Close

Dredging &

reclamation

Road & Rail

Connectivity

Tariff Fixation

Attracting

liner services

Development

of port based

ecosystem

Tariff Revision

Equipment

contracting /

installation

Competingterminal at

Port

Availability of

rail services

Rail / Road

congestion

Macroeconomic & Other Risks

Regulatory & Legal

Framework

Contractual

Framework

Economic Growth

Land

Acquisition

PolicyEconomic Policies

& Institutional

FrameworkCommodity

Prices

Credit Policy,

Inherent Risk &

Foreign Exchange

Environmental& Social Risk

Global Economy

HIGH

LOW


10/19


Lack of Integrated Planning

The central government and the states have their own independent port development plans resulting in skewed terminal capacity creation

The port development plans are not based on the expected demand potential

Poor Project Development

Poor project development and management skills amongst concessioning authorities both at the Central and State levels

State Maritime Boards lack technical and financial capability to develop projects and absorb early stage risks leading to fai led PPP initiatives and low returns

Lack of focus on systemic capacities like connectivity, CFS and warehousing eco-system

Governance

Identical underlying assets are concessioned under different frameworks and conditions

The concessioning agency (as in JNPT and Mundra) competes with the concessionaire violating the level playing field

There exists no mechanism or agency to monitor the quality of service provided to customers

Sub-optimal tariff regime at Major Ports

The mechanism does not reward higher efficiency, which is one of the key objectives of attracting private sector participation

Over-investment and under-utilisation are rewarded

While the market risk is borne by the private player with no protection on the lower side, the upsides of return are capped

The current mechanism will always result in tariffs that systematically decline even as costs rise

10

Key Issues


11/19


PPP in its current form leads to sub-optimal capital deployment, uncontrolled risks and poor utilisation of national assets

11

Conclusion


12/19


Annexure

12


13/19


P&O Ports (D.P World) was awarded the concession for NSICT based on a royalty payment increasing from from Rs.

45 per TEU in FY 00 to Rs. 5,610 per TEU in FY 27

The second private container terminal (GTI) was awarded to the consortium of APM Terminals & CONCOR on the

basis of highest quoted revenue share of 35.5%

Capacity creation at JNPT is undertaken only when existing capacity reaches choke stage

JNPT

13

0

900

1,800

2,700

3,600

4,500


'000TEU

Container Volume at JNPT

JNPCT NSICT GTI

47% 53%100%

Private Investments

NSICT GTI

NSICT achieved

Financial Closure

GTI Commenced

Operation

Concession Agreement

signed with consortium of

APM Terminals & CONCOR

NSICT Commenced

Operation

Concession Agreement signed

with P&O Ports (D.P World)

Capacity Congestion


14/19


PSA SICAL was awarded the development and operations of Berth No.7 based on royalty payments increasing from Rs 102 per TEU in 98-99 to Rs. 5,178 per TEU in

FY28

Total private investment in the terminal was ~Rs. 157 Crore

Changing TAMP guidelines have severely impacted the project concessionaire and hence performance of the terminal

Tuticorin

14

0

200

400

600


'00

0TEU

Container Volumes at Tuticorin


signed with PSA Sical

Commencement of

Operations by PSA Sical

Direct service to US

started

Direct service to

Europe started

Size of the vessels calling atterminal increased from 1,800

TEU to 2,800 TEU

RTW service with 4,000

TEU vessel started

15% tariff reduction

ordered by TAMP

50% Tariff r eduction

ordered by TAMP

In Aug07 Madras high court

quashed the TAMP order of

FY 03 & FY 06

34% Tariff r eduction

ordered by TAMP in

Dec07

NOTE: Tariff reduction was on the base tariff approved in 1999

Traffic Stagnation


15/19


Pipavav port was awarded to Sea King Infrastructure Ltd (SKIL) by Gujarat Maritime Board (GMB) based on a royalty payment of Rs. 10 per tonne for solid cargo and Rs.

20 per tonne for liquid cargo

Total private investment in the container terminal was ~Rs. 2,000 Crore

Rs. 536 Crore was invested in development of connectivity to the port

In FY01, A P Moller (APM) became a strategic partner and in FY05 AP Moller Maersk became the lead promoter with 54% stake

Pipavav

15

0

200

400

600

FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

000TEU

Container Volumes at Pipavav

Concession Agreement signed

between GMB & SKIL

APM group

joined SKIL

Rail Line

Commissioned

Commercial operation started

by APM Terminals

Supplementary Agreement was

signed with APM terminals

being the key promoter


16/19


Mundra port was awarded to Adani Ports Limited by Gujarat Maritime Board (GMB) based on a royalty payment of Rs. 10 per tonne for solid cargo and Rs. 20 per tonne

for liquid cargo

Total private investment in the container terminal was ~Rs. 1,608 Crore

Rs. 160 Crore was invested in development of connectivity to the port

Mundra

16

0

500

1000

1500

FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11

'000TEU

Container Volumes at Mundra

MICT MPSEZConcession Agreement signed

between GMB & Adani Ports

Limted

Sub-Concession Agreement was

signed between Adani Ports

and P&O Ports (D.P World)

Commercial operations

started on MICT

Rail Line

Commissioned

Commercial operation started

at second terminal by Adani

Ports Ltd

As per the MICT Sub-Concession agreement, upon the occurrence of the earlier of (i) container traffic handled at Container Terminal-I reaching 700,000 TEUs per year (ii ) eight

years from commencement of operations, MICT shall be entitled, but not required, to provide a written notice of 30 months requesting the handover of the second stage assets,

which are the assets related to Container Terminal II


17/19


In FY 02, the first container terminal (CCT) was awarded to D.P World at a revenue share of 37.128%

In FY 07, the second container terminal (CICTL) was awarded to PSA SICAL at revenue share of 45.801%

Total private investment in the terminals was ~Rs. 1,000 Cr for the quay development and Rs. 43 Cr was spend

by the public sector on capital dredging

Evacuation issues severely impact the capacity of container terminals at Chennai Port

Chennai

17

0

500

1,000

1,500

2,000


'000TEU

Container Volumes at Chennai

CPT CCT CICTL

40% 60%100%

Private Investments

CCT CICTL


signed with D.P World

for 885 meter quay (CCT)

CCT started operation

on existing berths (600

meters)

Commercial operation

started on additional berth of

285 meters by D.P World


signed with PSA Sical for 861

meter quay length (CICTL)

CICTLs commercial

operations started

Bidding process

started for Mega

Container terminal

Only bid received by

MPSEZ at revenue

share of 1.5%


18/19


In FY 03, the container terminal was awarded to VCT with DP World being the key partner at an agreed upon royalty share of Rs. 50 per TEU

Existing berth of 418 meters was transferred to VCT

Total private investment in the terminal was ~Rs. 108 Cr for quay strengthening & superstructure procurement

Rs. 114 crore was spend by the public sector for connectivity improvement works

The terminal is increasingly attracting volumes from Central India and Andhra Pradesh, earlier served by JNPT and Chennai ports

Visakhapatnam

18

0

70

140

210


'000TEU

Container Volumes at Visakhapatnam

Vizag VCT

Concession Agreement signed with

consortium including D.P WorldCommencement of operations

IndFex service

started linking China

Granite volumes

started to grow

Tobacco volumes

started to grow

Mearsk extends its Chennai

Far East service and start of

feeder service to Kolkata


19/19


In FY 02, Vallarpadam container terminal (ICTT) was awarded to DP World at a revenue share of 33.3%

The terminal targets attracting national and regional traffic to be transhipped at Cochin

Total private investment in the terminal was ~Rs. 2,118 crore

About Rs. 1,481 crore was spend by the public sector on capital dredging and connectivity improvement works

Local transport unions and low base volumes impact the potential of the container terminal at Cochin

Cochin

19

54% 26% 20%100%

Public Investments

Road Connectivity Dredging Rail Connectivity

0

100

200

300

400

500


'000TE

U

Container Volumes at Cochin


signed with D P World

Management & operations of

existing terminal (RGCT) takenover by D P World

Vallarpadam ContainerTerminal received

environmental clearance

Commercial operation startedat Vallarpadam container

terminal by D P World

Rail Line

Commissioned

Note: About 25,000 TEU traffic handled at ICTT in FY 11

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