India: Bidders turn ‘realistic’ in quoting revenue share in major port auctions
Revenue shares offered by private firms in at least two recently concluded auctions for running cargo terminals at Union government ports located in New Mangalore and Kandla are an indication of bidders taking “realistic” calls on port contracts, according to port experts.
“When the market and the economy are very good, people get misguided and they forget that this is a 30-year lease period and the revenue will not be there throughout. Now, they are taking a much more realistic call; how much revenue can be there and how much can be shared with the government-owned port. This trend will go further down,” said an executive at engineering consultancy Tata Consulting Engineers Ltd.
Chettinad International Bulk Terminal Pvt. Ltd, a unit of Chennai-based Chettinad Group, quoted a revenue share price bid of 31% to win a contract for mechanizing berth no 12 at the New Mangalore Port for loading 6.73 million tonnes (mt) of bulk cargo, mainly coal, for 30 years with an investment of Rs.470 crore.
Port contracts at Union government-owned ports are decided on the basis of revenue share—the entity willing to share the most from its annual revenue with the port gets the contract.
Port auctions had earlier fetched revenue shares exceeding 50% but some of them failed to materialize as lenders found the projects un-bankable due to the steep revenue share. These include projects at Visakhapatnam, V.O. Chidambaranar and Kolkata ports.
At Kandla Port, Mumbai-based port logistics firm United Liner Agencies of India (Pvt.) Ltd, put a price bid of 10.44% to become the highest bidder to run a container handling facility with a capacity to load 600,000 twenty foot equivalent units or TEUs (the standard size of a container) a year from berth numbers 11 and 12 at the port located on the western coast.
“One is market momentum. Secondly, the euphoria around ports and India’s growth story is kind of matured a little bit now. People are more prudent in how they go into these bids,” says Prahlad Tanwar, director, transport and logistics at consulting firm KPMG Global Services Pvt. Ltd.
“Bidders have become slightly more practical and wise. Firms have matured and have realized how this game can be played”.
“The 40-50% revenue share days are over,” says D.K. Manral, chief executive officer of Vizag General Cargo Berth Pvt. Ltd, a unit of London-listed metals group Vedanta Resources Plc, which runs a cargo terminal at the union government-owned Visakhapatnam Port.
“Projects will now go in the range of 15-18%. Serious bidders will only bid between 15-18% or maximum 20%, beyond that there is no margin. Competition has become very intense, earlier there was no competition. Today, non-major ports (those outside the control of the Union government and free to set rates based on market forces) have become so competitive; they can take the cost up, they can take the costs down and they are giving a tough fight to monopolistic situations which are there.
And with that situation your revenue is not assured; when your revenue is not assured your volumes are also not assured and that means you have to be very cautious while bidding for port assets. The government-owned port trusts made a killing in the past from the high revenue share offered by port developers. People have burnt their fingers now,” he added.
But, some port firms such as ABG Infralogistics Ltd does not see this as a trend. “Revenue share is not some guess work. Nobody is quoting revenue share on guess work. Revenue share is a function of volume, time, tariff and return on investment. If somebody is happy with a 20% return on investment, he’ll share 50% with the government port. But if the cargo volume is less, and with a lower cargo volume, if somebody wants a 30% return, then he’ll only quote a 20% revenue share,” a spokesman for ABG Infralogistics said.
The shipping ministry aims to award 30 cargo handling projects at state-owned ports by March 2016 involving an investment of Rs.14,225 crores and raise capacity by 162 million tonnes (mt).