25-05-2016

Shipping Ministry to revise model pact for Port projects

PortP

The Government is preparing for a large-scale tinkering of a so-called model concession agreement (MCA) used by Major Ports while granting rights to private firms for developing cargo-handling facilities, as it looks to boost investor sentiment in the sector through better allocation of risks between the Government and the private firms amid slowing global trade.

A concession agreement sets out the terms and conditions of a port contract.

The MCA that is followed currently mandates that a private developer handles a minimum guaranteed cargo (MGC) every year specified in the 30-year contract. Failure to achieve the prescribed MGC for three consecutive years can lead to termination of the contract.

The Government plans to replace MGC with a minimum guaranteed revenue (MGR) that a private developer has to pay the port authority for each year of a 30-year contract. In case gross revenue from operations falls short of MGR in a year, the private developer can make good the shortfall by paying from his pocket or let the project go into default and subsequent termination if the shortfall occurs for three consecutive years.

“For a multi-cargo terminal, the MGR gives more flexibility,” says N. Muruganandam, Managing Director of Indian Ports Association. “Even if the facility is not doing well in one particular cargo, it is able to do it in some other cargo which has a higher tariff. So, we are looking at overall revenue”.

“Whereas if you go by MGC, the developer will only target a particular cargo of a certain capacity. So, it becomes more stringent. The MGR gives more flexibility because in case the tariff goes up or revenue goes up, even with less cargo, they will be able to meet the MGR,” Muruganandam added.

Port contracts are decided on the basis of revenue share—the entity willing to share the most from its annual revenue gets the deal, typically stretching 30 years.

The new model concession agreement will provide for renegotiating the concession period either by compressing the 30-year period or extending the term if the actual average traffic exceeds the target traffic or falls short of it by more than 20%.

Any increase in the tenure of the concession period will be capped at 10 years in case an increase is necessitated due to lower traffic. However, a reduction in concession period due to higher volumes will be capped at 3 years.

The private developer may opt to pay a further premium equal to 10% of the gross revenue in lieu of a reduction in concession period.

Cargo-handling contracts to be auctioned by Union 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 (typically spanning 30 years), 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 was not made applicable to an existing private developer.

Source: Daily Shipping News

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