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Winds of Change
Hemant B Bhattbhatt, Senior Director, Deloitte Touche Tohmatsu India Private Limited The Indian ports and shipping sector is passing through one of the most exciting and uncertain times. As a service industry, this sector subsists on the growth of the country’s trade in physical goods. Analysts typically use the correlation between trade and GDP to estimate the potential demand for services of this sector.

The Maritime Agenda 2020 also makes a 'capacity required' forecast, using similar logic and forecasts the need for the country's port capacity to be 3.2 billion tonnes by 2020. Quite wisely it also factors into this analysis the idea of optimal utilisation of berth capacity at no more than 75 per cent and proposes such additional capacity creation. Financing of this capacity creation is proposed through the route of PPP with almost 95 per cent of the financing coming from the private sector.

Private sector will commit investments only after confirming the profitability of the venture. This depends primarily on proven demand. By the time demand becomes manifest or can be proven with some degree of certainty, the trade has already experienced service inadequacy issues. Considering the at-least 3-4 years of gestation period normally experienced in such capacity creation, the trade suffers from poor and inefficient services for a long while before the capacity comes up. Unfortunately this trend will continue unless the PPP dependence is rethought. Also, a lot needs to be done to hasten up the pace of infrastructure creation in terms of, expediting the process of according various clearances for these projects.

The wish list for the future would hence include a genuine 'single window clearance’ mechanism, over-riding the turfs of different ministries and the central and state governments, to be put in place. Whether it materialises or not remains to be seen. As such one can expect the levels of utilisation at our ports to remain rather high, and turnaround times below par.

The use of 'revenue share' used as the criterion for private developer selection at non-major ports, where tariff regulation with reference to operating cost does not exist, also tends to make the port services expensive. A more appropriate way would be to award the projects based on the lowest tariff proposed for the port services. The coming up of the tariff regulator, with indirect control over non-major port tariffs, is likely to change this situation.

A suitable mechanism of assessing the degree and intensity of competition (inter-port as well as intra-port) needs to be developed and using a maturity model selective relaxation from tariff regulation introduced, especially for ports not necessarily operating in monopolistic situations.

The new policy for captive jetties queers the pitch further for the multi-user ports coming up under PPPs. With the proximity port embargo clauses not being followed very scrupulously, such investors are already a concerned lot. This can also impact the financing flowing to such projects. Successful port projects require high degree of cargo assurance. Applying the 80:20 rule, such assurance comes not from hundreds of miscellaneous and random customers, but from a few large committed customers.

The idea of corporatisation of ports has been discussed, debated and brought up for implementation on several occasions without success. While the detractors argue for achieving the same objectives without effecting such organisational change, the proponents point out to a long history of performance which reads otherwise. Given its political overtones, corporatisation of major ports is unlikely till a proreform government uninhibited by coalition constraints is in charge of the issue. And that looks very unlikely in the near future. Maritime boards are proposed to be formulated in various states for speedy development and regulation of the non-major ports of India. Andhra Pradesh, Tamil Nadu, Kerala etc. are some of the states which have initiated steps to operationalise maritime boards for their states on the lines of Gujarat.

In order to achieve the required capacity creation, it would be important for the government to take a greater role in financing and creating the infrastructure, than currently proposed. On one hand we envy the Chinese infrastructure development, and on the other, we ignore that it has come up due to huge government involvement. That in my view remains the right way. This also addresses firmly the several issues like environment management, land acquisition and other infrastructure creation issues. I am afraid the gateway capacity bottlenecks will otherwise continue to make India’s trade inefficient and slow the pace of economic progress. A superior construct could be, for the government to create the infrastructure based on needs assessed, and then to hand over the operations and management to suitably incentivised private port operators on a ‘least cost of service’ charged to the users’ basis. This will focus more on achieving the larger purpose of making Indian trade globally competitive rather than on the narrower focus of making the ports industry profitable. With the Baltic Dry Index touching its lowest levels ever, the shipping industry is globally in a serious situation. The oversupply of vessels in the market, peaking of deliveries of ships ordered around the high of 2007-08, the global economic recession with several developed countries passing through difficult times and the breadth (across various industries) and length (in time) of the downturn - all have impacted the global shipping markets. That the bunker costs have remained high has not done much to help the situation. The industry will need to witness a shake-out if the freight levels are to revert to reasonable levels enabling normal profits in the shipping business. While player shakeout is possible, capacity reduction due to the same is not very predictable as it may simply change hands.

The Indian demographics are understood to be the most attractive and likely to remain so until 2050. As such the Indian economy’s growth is expected to be fuelled significantly by its own internal consumption demand. The high energy needs of the country and its reliance on fossil fuels for this implies need for significant gateway capacity to import the fuel.

Besides, the lifestyle changes consequent to the rising levels of affluence of the population are likely to drive the demand for luxury goods. Growth of such cargo as well as trend towards containerisation spells the need for more container terminals. As such coal, crude and containers are likely to dominate the country’s trade in goods. It might hence be possible to support the shipping sector through suitable trade mechanisms like insistence on FOB terms for all imports. This issue though can have several other challenges for practicability.

Coastal shipping and inland water transport are much neglected areas and need attention from the perspective of making our domestic cargo transportation cost efficient and also for decongesting the other modes of transport. The new policy on coastal shipping is anxiously awaited and will hopefully address the multitude of issues (including fuel subsidy parity and cabotage relaxation) the industry is seeking to highlight. This is one sector which is likely to see a lot of action in the next few years as the fundamental case for its value addition is quite strong.

Currently Indian fleet constitutes of total of 1040 ships which include 700 coastal ships and 340 overseas ships. The age profile of Indian merchant ships indicate that around 43 per cent of the ships age above 20 years of age which provide tremendous opportunity in the coming years for ship repair and shipbuilding facilities. Given the current situation shipping companies are turning their attention to off-shore servicing and the ship-building industry to the newly opened up defense sector. We can expect technology tie-ups and joint ventures between the PSEs and the private shipyards to address this market. These will be exiting times for defense shipbuilding for sure.