India's efforts to shift existing private cargo terminals at its dozen state-owned ports to a new market-linked tariff regime that was announced on 31 July for new projects have hit a hurdle.
Private firms running cargo terminals whose rates are set on the basis of guidelines framed in 2005 have put forth two key conditions if they are to accept any framework being finalized by the government to move to a regime that creates a level playing field for both new and older facilities.

First, private cargo handlers want the government to protect the prevailing rates-in cases where the rates are more-when they are allowed to migrate to the new regime. This demand stems from fears that a majority of the private facilities operating under the 2005 guidelines will see a reduction in their reference or ceiling rate (the base rate to start with) when they migrate to the new regime because of the way the tariffs are worked out under the 2013 guideline.

Private firms are opposed to moving to a regime where the base rate is actually less than what they are currently charging their customers. These firms argue that it has become unviable to operate the facilities even at existing rates. Hence, moving to a new regime that reduces their rates, rather than one which allows an increase, will be detrimental to operating their facilities as commercially viable entities.

India's shipping ministry has said it cannot accept this condition. Because tariffs at many of the existing terminals have been kept at the prevailing levels by the courts on petitions filed by terminal operators after their rates were cut by the Tariff Authority for Major Ports (Tamp), the tariff regulator for ports controlled by the Indian government.
Accepting this contention of private firms will mean that the orders issued by Tamp to cut rates were wrong, the shipping ministry reckons. It may also necessitate taking an opinion from India's solicitor general to verify whether such a decision, if agreed to, is legally tenable.

Secondly, private firms want the existing performance parameters written into their contracts to be honoured. Performance standard is a key ingredient in the new tariff setting regime that allows cargo handlers the flexibility to fix rates based on market forces. Cargo terminals will be allowed to charge a maximum 15% more (termed as performance-linked tariff) than the reference rate during each year of a 30-year port contract if they comply with certain performance standards prescribed by the tariff regulator.

Private firms are of the view that to expect the existing facilities to perform much better to win a performance-linked rate hike would be asking for the impossible, given that they are operating with older equipment. New performance parameters can be made applicable after the terminals replace their older equipment with new ones, which typically happens half way through their 30-year contract.

In comparison, the exercise to allow cargo- and ship-related services provided by the government-run ports themselves to migrate to the new tariff regime is on track. The shipping ministry has made substantial progress in this regard by drafting a set of guidelines for these services which remove many of the flaws inherent in the 2005 guidelines.

The ministry has proposed far-reaching changes in the draft guidelines by expanding the definition of capital employed to include capital work in progress apart from net fixed assets and working capital. Only the last two elements were counted under the 2005 regime.
Accordingly, each of the 12 ports will be allowed to rework their base rates to the extent needed for meeting their annual revenue requirement after factoring a 16% return on capital employed. The annual revenue requirement will be the average of the actual expenditure for the past three years.

The government-run ports will have the flexibility to work out their base rates afresh for cargo- and vessel-related services on the basis of the annual revenue requirement, subject to a maximum tariff hike in a tariff item of up to 40% over the existing rate.
Once the base rate is re-drawn, the port-run facilities will be allowed a further hike every year if they meet certain performance standards.

In this case, the performance standards will be benchmarked against annual targets set by the shipping ministry in the result framework document for the 12 ports. These ports will be allowed to seek a 15% hike on the ceiling rate every year from the tariff regulator if they meet the excellent grade mentioned in the result framework document of the shipping ministry.
Even if the government-owned ports fail to comply with the performance criteria set out in the result framework document of the shipping ministry, they will still get a rate hike every year because the reference rates are 100% indexed to the Wholesale Price Index (WPI) to account for inflation.

In the tariff-setting guidelines announced for new projects on 31 July, the automatic indexation is limited to 60% of WPI.

The migration to the new tariff regime for privately-run cargo terminals will have to wait till a consensus is worked out between the shipping ministry and the private firms.