EXCLUSIVE PSA

Published on March 28th, 2017

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Gadkari Clueless on Solving PSA’s Tuticorin Terminal Woes

A solution to the long pending dispute between union government-owned V O Chidambaranar Port Trust (VOCPT) and a container terminal majority owned by Singapore’s PSA International Pvt Ltd at Tuticorin port in Tamil Nadu that involves rates issues, policy change and a raft of court cases has foxed even a consummate problem solver and out-of-the-box thinker such as Shipping Minister Nitin Gadkari.

That nobody is willing to bell the cat is evident from the ping-pong game between the shipping ministry and VOCPT on the issue.

On 28 November 2016, based on a resolution by the board of trustees of VOCPT at a 11 November 2016 meeting, VOCPT sent a report prepared by a consultant on “amicably settling” the vexed issue to the shipping ministry along with a detailed note incorporating the financial implications and opinion of the port on each of the three options suggested by the consultant, “before taking further action” including terminating the contract.

On 16 December 2016, the shipping ministry directed VOCPT to “decide the matter in its board meeting”.

“You are, therefore, requested to take further necessary action in the matter and submit an action taken report to this ministry urgently,”, according to the shipping ministry communication to VOCPT reviewed by India Tradeways.

VOCPTFollowing the ministry diktat, VOCPT held two meetings of its board of trustees, on 3 February and 17 March, but could not decide on the matter. The March meeting of the board of trustees was the last for the current board of trustees which are typically constituted for a two-year period according to rules framed by the shipping ministry.

A decision on the PSA-Sical issue is expected to be delayed further as the re-constitution of the board of trustees is a time-consuming process.

Industry sources say that the outcome of the on-going court case filed by port industry lobby Indian Private Ports and Terminals Association (IPPTA) in the Delhi high court relating to migration of old cargo handlers to the new rate regime of 2013 could have a bearing on the PSA-Sical case also.

The 2005 rate setting guidelines under which terminals such as PSA-Sical operate is considered faulty because it penalizes efficiency (handling more than the projected volumes). This has been amply demonstrated in the three rate cuts at the PSA-Sical facility.

But, the IPPTA case also has been dragging on for a long time. Besides, whichever party loses is sure to file an appeal in the Supreme court, delaying the case further.

Sources also say that Gadkari could be buying time by not taking a decision till Parliament passes the Bill to convert port trusts into port authorities. The Major Port Authorities Bill also seeks to set up a Major Ports Adjudicatory Board which, among other things, will have the mandate “to review stressed PPP projects and suggest measures to revive such projects”.

This would mean that a potentially politically risky task of bailing out stressed terminals or at least making recommendations for a bail-out would be entrusted to an agency set up through an Act of Parliament that has law makers cutting across party lines. In this way, the government could shield itself from charges of giving favourable treatment to cargo terminals at the expense of the exchequer, an industry expert said.

PSA-Sical case could be a perfect candidate for such a review.

Another view expressed by industry experts is that the government is reluctant to act against PSA given the company’s global stature as a container terminal operator, besides, more importantly, its parentage, being owned by Temasek Holdings Pte Ltd, the sovereign wealth fund of Singapore.

The story of PSA-Sical is a complicated one involving 17 court cases (some finalized; others awaiting orders), an arbitration award, three rate cuts by TAMP and opinion of the attorney general.

PSA-Sical Terminals Ltd, the entity that runs the container terminal at VOCPT (formerly known as Tuticorin Port Trust) from 1999, is 62.5% owned by PSA International Pte Ltd. The balance stake is held by Sical Logistics Ltd.

PSAWith the royalty it is contractually mandated to pay VOCPT on each container handled at the terminal rising every year by 20 per cent and with the rates it is allowed to collect from users remaining static due to reductions ordered by the Tariff Authority for Major Ports (TAMP), the rate regulator for 11 of the 12 major ports owned by the union government, PSA-Sical went to court to bail the terminal out of a difficult situation that had the potential to hurt its viability.

In June 2011, PSA secured a stay from the district court in Tuticorin, freezing the annual royalty it is contractually mandated to pay VOCPT at the level set for 2010 as part of the 30-year contract.

This was the first instance of a court-backed freeze on revision in royalty for a port contract after the ports sector was opened to private funds in 1997.

According to the terms of the PSA contract, the royalty per twenty-foot equivalent unit or TEU was set at Rs 102 in the second year of operations. In the 30th year of operations in 2028, it will reach Rs 5,178 for a TEU.

As a result of the Tuticorin district court order, PSA continues to pay a royalty of Rs1,969 per TEU (the level set for 2010 in the contract) to VOCPT.

If the stay had not been granted, PSA would have been contractually mandated to pay Rs2,264 per TEU as royalty to VOCPT from 15 July 2011. This would have risen to Rs2,490 a TEU from 15 July 2012, going up to Rs2,615 from 15 July 2013, Rs2,746 from 15 July 2014, Rs2,883 from 15 July 2015, and so on. At this rate, the royalty payment to VOCPT would be higher than the rate per TEU, forcing PSA-Sical to pay money from its pocket to keep the terminal functional.

The arrears of royalty between 15 July 2011 and 31 October 2016 including interest and penalty to be paid by PSA-Sical works out to Rs.502.51 crores, according to VOCPT. Even if the contract is terminated, the arrears cannot be recovered in full because the performance bank guarantee given by PSA-Sical is for Rs 62.07 crore and the assets will not fetch much because of its depreciated value, resulting in a financial loss to VOCPT.

Viewed in this context, the First Information Report (FIR) filed by the CBI against two general managers of Kamarajar Port Limited (KPL) for allegedly favouring a private terminal at the port in realising dues of about Rs 55 crore, pales into insignificance.

Chettinad International Coal Terminal Pvt Ltd (CICTPL) started operating a coal terminal at Kamarajar Port in 2010 on revenue share basis.

The FIR alleged that CICTPL did not pay full revenue share to KPL from the day it commenced operations. CICTPL was paying revenue share after deducting the augmentation charges, in an alleged violation of the license agreement, it said.

When demand for full revenue was raised by KPL, CICTPL invoked dispute resolution mechanism but the expert committee constituted under it rejected the claims of CICTPL.

“Despite the advice of legal counsel, the two general managers dishonestly failed to take further action for the recovery of the outstanding amount from CICTPL by deliberately delaying invoking the available bank guarantee,” the CBI alleged in the FIR.

“We have paid the entire dues to KPL in December 2016, under protest, in accordance with the Award of the Arbitral Tribunal and as such there are no pending dues to KPL from our Company arising out of Arbitration proceedings. We are confident that we will come out clean in the said CBI case,” K Dhandapani from CICTPL legal department said in a statement on 4 March.

In the 18 years since starting operations in 1999, PSA-Sical made three attempts to raise rates for the services provided at the terminal, but each time the tariff regulator for Union government-controlled ports slashed rates—by 15% in 2002, 54% in 2006 and 34%in 2008, which PSA-Sical did not implement by securing stay orders from the Madras high court.

In effect, PSA-Sical is operating the facility with a capacity to handle 4.5 lakh TEUs a year at rates approved in 1999, when it started out on a 30-year contract.

PSA has defended its move to freeze the royalty pay-out with the backing of the court, arguing that the tariff cuts would reduce the revenue-earning capability of the terminal and turn it into a loss-making unit.

VOCPT tried to get the royalty freeze overturned, but was not successful in its efforts.

PSA has argued that it cannot give more royalty to VOCPT till it is allowed to increase rates. Getting a hike, though, is considered impossible given that, in the eyes of TAMP, PSA would have accumulated surplus over the years due to non-implementation of earlier rate cuts, warranting further reductions in future. To stay and operate under the current terms and conditions would, thus, be suicidal for PSA-Sical.

PSA-Sical, hence, resorted to arbitration.

The arbitration award, passed on 14 February 2014, said that PSA-Sical Terminals should be allowed to move to a revenue-share format from a royalty model by adopting the revenue share percentage of 55.19 per cent quoted by Dakshin Bharat Gateway Terminal Pvt Ltd in September 2012 for a new container terminal, the second at VOCPT. The Arbitration award said that this shift should be made effective from 31 July 2013.

The earliest container terminal privatization contracts such as the one at VOCPT followed the royalty model. The terminal operator had to pay a certain royalty specified in the contract on each TEU handled at the terminal to the government-owned port. The royalty rises by about 20% every year in July till the end of the contract.

Since then, Indian government-owned ports have switched to the revenue share model for port privatization contracts. The bidder willing to share the most from its annual revenue with the government-owned port wins the contract, typically lasting 30 years.

PSA-Sical Terminals cited a government policy after starting operations, denying it to factor in the full royalty paid by it to VOCPT as a cost element while setting rates, as a change in law and therefore it is entitled to have the contract amended. This view was upheld by the arbitration tribunal.

The 2005 decision of the shipping ministry not to allow royalty/revenue share paid by terminal operators to the government-owned port trusts as a pass through in calculating rates is perhaps the only decision among the many taken by the ministry pertaining to rates that was made effective retrospectively, while others were all applied prospectively, creating the mess prevailing in the port sector today.

VOCPT reckons that the port would suffer a revenue loss of around Rs 1,135 crore for the balance period of the concession if PSA-Sical is allowed to move to revenue share model from the royalty model prospectively in line with the Arbitration award. The loss to the port due to this will be about Rs 1,039 crore if the shift to revenue share model is done retrospectively

VOCPT filed an appeal under section 34 in the Madras high court challenging the tribunal’s award, which was transferred to the district court where the appeal was rejected.

On 7 August 2015, India’s chief legal adviser, attorney general Mukul Rohatgi, said that VOCPT can scrap the container terminal contract because the terminal operator defaulted on paying the contractually-mandated royalty to the government port.

“I am of the considered opinion that the querist (V.O. Chidambaranar Port Trust) can terminate the licence agreement and also claim compensation if it deem fits,” Rohatgi said in his advice.

“The period of license agreement is 30 years which ends sometime in 2028 and instead of continuing the disputes, it is best advised that the port trust invokes the termination clause on the ground that there has been default in payment of royalty,” attorney general Rohatgi wrote in his opinion. India Tradeways has reviewed a copy of the AGs opinion.

Even after the AG gave his opinion, VOCPT and the shipping ministry soft pedalled a decision for reasons best known to them. The Board of Trustees of VOCPT at a meeting on 17 October 2015 decided to wait for the court order on one of the cases before taking any action on termination of contract.

Exporters and importers in and around Tuticorin are in favour of resolving the dispute amicably without terminating the contract for continuation of business.

Moreover, the shift from royalty to revenue share is a policy decision to be taken by the government which cannot be taken by VOCPT or its board of trustees.

In a 23 June 2016 communication, the shipping ministry told VOCPT that “post bid changes which involve modification/amendments to the concession agreement are not permissible until the project is appraised afresh and approval of the competent authority is obtained following prescribed procedure”.

In port concessions, non-payment of royalty/revenue share is cited as an event of default that can be used by the port authority to terminate the concession. If this was not reason enough for VOCPT to terminate the concession, there is another strong default event confronting PSA-Sical.

PSA-Sical is contractually bound to replace the three rail mounted quay cranes (RMQCs) of single lift spreader and the nine rubber tyred gantry cranes (RTGCs) deployed at the terminal “between 17th to 20th year from the date of existence of the assets”. This contractual obligation has already kicked-in but PSA-Sical has not yet begun the process of replacing old equipment with new modern gears, which some experts say should have been done by December 2016.

PSA-Sical is pushing VOCPT for early conversion to revenue share stating that the “financial constraints of the current regime prevents it from proceedings with any equipment replacement or capacity increases”.

Port experts say that PSA-Sical has made handsome returns on its investments in the terminal during the initial years of the contract when the royalty was low. “Nobody pointed a gun at PSA-Sical asking them to sign the contract. They did so with open eyes and being fully aware of the fact that the royalty escalates as years go by. The mistake they did was in assuming that the rates would increase in tandem with the rise in royalty. This did not happen,” a port expert said. They don’t want to lose whatever they have earned in the initial years, he said.

To be fair to PSA-Sical, the facility is contractually mandated to handle a minimum guaranteed throughput (MGT) of 300,000 TEUs from the sixth years onwards till the end of the concession. However, the terminal, handles close to 500,000 TEUs a year.

In a 16 March 2016 meeting, the board of trustees of VOCPT decided to appoint a consultant to prepare a comprehensive report for further deliberation on the issue.

The consultants- two officials who had super-annuated from major ports- were hired by VOCPT at a cost of Rs 7 lakhs plus taxes to write a report on the issue.

In its final report submitted to VOCPT on 26 October 2016, the consultant suggested three options.

First, to consider the revenue share of 55.19% as per the arbitral award with reference rate fixed for the entire contract period from retrospective date beginning 21 December 1999 and not prospectively from 31 July 2013 as suggested by the award.

The rising royalty and the lower rates have rendered the business model envisaged 17 years ago “not workable”.

“Revenue share model is more business-friendly and conducive for growth in revenue for either party,” the consultant wrote in the report.

Under option 2, VOCPT may take over the operation from PSA-Sical after scrapping the contract and allow stevedoring to them for the intermittent period till re-tendering is completed wherein PSA-Sical will be granted the right of first refusal.

In both these options, the court cases pending before various courts should be withdrawn by both the sides.

The third option is to terminate the contract as advised by the Attorney General and issue a fresh tender.

The financial implication of option 1 will be net loss to VOCPT ranging from Rs 378.32 crore to Rs 453.17 to Rs 911.25 crore under three different traffic scenarios.

Under option 2 and 3, the port will suffer a net loss of Rs 561.18 crore.

The consultant suggested that option 1 is “most preferable” in order to have uniformity in policies to promote ease of doing business as port projects are awarded under the revenue share model since 2004.

However, VOCPT is of the opinion that it may “implement the third option (terminate the concession), with the approval of the shipping ministry, which is within the framework of the license agreement”.

This is also based on the legal opinion obtained from the Attorney General of India. If the shipping ministry is not considering the third option, then the port may opt for the second option in consultation with PSA-Sical and with the ministry’s approval, according to VOCPT.

To be sure, Gadkari did not contribute to this mess. He inherited it from the previous government. But, so did he inherit thousands of crores of stressed projects in the roads sector, which he quickly moved to resolve within a few months of assuming charge as the shipping, road transport and highways minister. Gadkari never spared an opportunity to pat himself up in public for reviving investor interest in the highways sector due to such actions.

But, PSA-Sical could be a different ball game altogether for Gadkari. The last thing that the government wants is to have the stigma of favouritism shown by one of its senior ministers sullying its image, giving a demoralised opposition a much-needed handle to attack the government.

Moreover, it could set a precedent for similar demands in future.

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