New model concession agreement written by the shipping ministry seeks to replace the rigidity associated with the present one to deal with market dynamics over a contract period that typically lasts 30 years.
For years, private investors have lived with a rigid model concession agreement (MCA) that outlines the terms and conditions of a cargo contract at ports owned by the Indian government.
This may be about to change as India embarks on an ambitious programme for port-led development that entails the setting up of 400 projects requiring an investment of some Rs.4.5 trillion.
The new MCA written by the shipping ministry seeks to replace the rigidity associated with the present one to deal with market dynamics over a contract period that typically lasts 30 years. In its place, the new MCA will give more flexibility to investors. Mechanisms are being introduced to better balance risks between stakeholders rather than subject the private developer to more risks than the port authority, as is currently the case.
For instance, the new MCA will facilitate the extension or reduction of the contract tenure to deal with cargo volatilities. It will allow private developers to extend the concession period if the traffic demand is lower than forecast due to regulatory changes.
Accordingly, if the actual average traffic for 15 years from the start of commercial operations falls short of the target traffic by more than 20%, then for every slab of 2% shortfall above the threshold of 20%, the concession period shall be increased by one year. Such increases, though, will be restricted to 10 years overall. The target traffic will be equivalent to 70% of the capacity of the project.
For instance, in the event of a shortfall of 25% in target traffic, the concession period will be increased by two years.
On the other hand, if the actual average traffic for 15 years exceeds the target traffic, then for every slab of 2% excess above the threshold of 20%, the concession period shall be reduced by one year and such reductions will be capped at three years overall.
However, the private developer can avoid the reduction in the concession period by opting to pay a further premium equal to 10% of the gross revenue in the respective years.
Port contracts are decided on the basis of revenue share – the entity willing to share the most from its annual revenue will get the deal.
The new MCA seeks to introduce the minimum guaranteed revenue (MGR) concept in place of the existing minimum guaranteed cargo (MGC) norms.
A private developer is currently bound by the MGC prescribed by the MCA. Failure to achieve the prescribed MGC for three consecutive years can lead to termination of the contract.
However, the minimum cargo levels may not be achieved due to a variety of reasons, including those beyond the control of the private developer.
For a multi-cargo terminal, the MGR gives more flexibility. Because, even if the facility is not doing well in one particular cargo, it would be able to perform better in some other cargo which has a higher tariff. Whereas, in the case of MGC, the developer will only target a particular cargo of a certain capacity. This makes the contract more stringent. The MGR gives more flexibility because in case the tariff goes up or revenue rises, even with lesser cargo, the developer will be able to meet the MGR.
In a way, the MGR concept takes the cargo pressure out of a developer’s mind. This could bring in revenue pressures. MGR, still, is the right approach because it makes more logical sense.
The revenue share payable by the private developer to the port authority will be computed on the maximum/ceiling rate allowed to be levied on users.
The discounts given to users are excluded from the calculation of gross revenue.
However, if the discount offered to users is more than 10% of the ceiling rate, the private developer will be allowed to pay revenue share on the discounted tariff, with the approval of the port authority, according to the new plan.
Storage charges will also now be excluded from the computation of gross revenue in a departure from the current practice.
The original promoters of the project should hold 51% of the equity for three years after the start of commercial operations, 26% equity for another three years and thereafter exit the project completely. The promoters, however, can exit the project earlier by seeking a waiver of the 26% equity holding requirement from the port authority subject to achievement of performance parameters during the three years after commercial operations.
In the existing MCA, the promoters have to hold 51% equity for three years after commercial operations and a 26% stake during the balance period of concession.
Cargo-handling contracts to be auctioned by the Indian government-owned ports will allow flexibility to its operators to move to new tariff regimes than the one prescribed at the time of signing the deal.
Currently, private developers are bound by the tariff guidelines applicable on the date of signing the concession agreement for setting the rates to be collected from users of the facilities, according to the current MCA.
“However, in the event the said tariff guidelines are either amended, revised or replaced by a fresh set of tariff guidelines at any time during the concession period, such amended, revised or fresh set of tariff guidelines, as the case may be, shall be the applicable tariff guidelines, provided the concessionaire (the private developer) exercises an option to recover tariff under such amended, revised or fresh set of tariff guidelines within a period of 30 days from the date of its publication in the official gazette,” the shipping ministry wrote in the draft of the revised MCA.
So far, in case the existing tariff guidelines are later amended, revised or replaced by a fresh set tariff of guidelines, it has not been made applicable to an existing private developer. The large-scale overhaul of the contract terms is a big positive for port investors