ICRA Rating Feat ure

Indian Port Sector: Key Trends and Credit Challenges

Contacts
Anjan Ghosh aghosh@icraindia.com +91-22-30470006 K. Ravichandran ravichandran@icraindia.com +91-44-45964301 Neha Joshi nehaj@icraindia.com +91-124-4545309

SUMMARY OPINION
Growth in the cumulative volume of cargo handled by Indian ports rebounded in 2009-10 in line with the pickup in economic activity, reporting a 15% year-on-year (yoy) increase. The growth came
after the slump of 2008-09 that had been caused primarily by a weak global environment and recessionary conditions. Going

forward, the medium to long term outlook for cargo growth remains robust, given that the scale of the ongoing and proposed
investments in key end-user industries like power, steel, and refinery point to a favourable demand environment for the sector in general and for the ports handling the cargoes concerned in

particular. The favourable demand environment anticipated is in turn expected to spur growth in various port related logistics and service activities although the players concerned would also have to contend with increasing competitive pressures. On the supply side, while many port projects and operationsrelated improvements have been proposed both by the government under its National Maritime Development Programme
and by various private ventures, the actual translation of the

Aug ust 2010

potential into capacity has so far been lacklustre, owing mainly to various policy-related impediments. With many of these issues still
persisting, supply addition is likely to lag demand growth, which in turn could lead to the major ports continuing to face a strain on

their operating efficiency. The ones to benefit from this likely

scenario would be the private ports (operational) who would get to

service the spil -over of cargo and gain market share at the cost of the major ports. The private sector is set to play an increasingly larger role in the
Indian context as is evident from its growing share in the cargo mix (up from 27% in 2005-06 to 34% in 2009-10); its dominance in upcoming and proposed greenfield ventures (all these are in the private sector); its increasing presence at major ports through

public-private partnership (PPP) projects; and its active participation in port support and logistics activities. While the favourable demand-supply dynamics anticipated are expected to create a positive environment for growth and in turn favourably impact the business and financial risk profiles of port companies, from the credit perspective certain challenges remain, the most prominent of which include the ability to manage project risks, regulatory risks and systemic issues in an evolving environment.
Page 1

Website www.icra.in

ICRA Rating Services

ICRA Rating Feature

Indian Port Sector: Key Trends & Credit Challenges

Background
India is natural y endowed with a long coastline spanning 7,517 km wherein the countrys 13 major
ports and around 200 non-major ports (including minor, intermediate and captive ports) are located across nine maritime States. Of the non-major ports, around 66 are operational and these are mainly
1

in the States of Gujarat, Andhra Pradesh, Goa, and Maharashtra. The distinction between major and
minor ports is done not according to size but on the basis of who they are administered by. The major ports are administered by the Central Government while the non-major ports are control ed by the

State Governments concerned either directly or through State maritime boards. Most of the major
ports (except Ennore) are trusts while the minor ports are corporate entities, generally special purpose vehicles (SPVs). Tariff setting for all the major ports (except Ennore) is done by the Tariff Authority for Major Ports (TAMP), which sets the ceiling tariffs that can be levied on the basis of a normative cost plus return on capital employed. The minor ports on the other hand enjoy tariff setting flexibility and price their services on the basis of market conditions, port facilities, capital costs, and such other factors. Up to the 1990s, port activity in India was dominated by the Government sector, with the major ports accounting for most of the cargo handled. This was so because of the capital intensive nature and the long gestation period associated with port investments, besides the criticality of ports from the trade and security points of view. However, the problems of capacity constraints, performance inefficiencies, increasing demand from the countrys industrial and trading activities and

the large scale investment requirements necessitated the privatisation of the sector. Postliberalisation, the participation of private players (domestic as well as global entities) in the port sector
has been encouraging, as is evident from their investments in greenfield commercial and captive ports and in various port related logistics and support activities. Even the major ports now appear to be tilting towards a landlord port model wherein most operations and new development would be

outsourced to private players under PPP arrangements.

Key TrendsDemand and Supply Past trend in cargo growth robust except in 2008-09; outlook favourable for medium to long term: Cargo traffic at Indian ports reported a compounded annual growth rate (CAGR) of
10% from 579 mil ion metric tonnes (mmt) in 2005-06 to around 846 mmt in 2009-10, being driven by the growth in GDP and in trading activities (exports and imports). Traffic flows posted a CAGR of 16% over the period 2005-06 to 2009-10 at non-major ports and of 7% at the major ports (the lower growth rate of the latter to be seen in the context of a larger base). After being on a consistently upward trajectory with yoy growth in the range of 10-12%, fiscal 2008-09 proved weak for the port sector with cargo volumes growing by a meagre 1% because of the overal weak macroeconomic environment, global recessionary conditions, and fall in trade activity and cargo movement. While the major ports were able to post a 2% yoy growth in 2008-09, cargo volumes at the non-major ports dipped 1% yoy that year. However in 2009-10, volume growth rebounded following a pickup in economic activity and reported a 15% yoy increase over 2008-09 with cargo volumes up by a substantial 41% yoy at the non-major ports and by a 6% yoy at the major ports. In 2009-10, the major ports accounted for 66% of the total cargo handled and the non-major ports for the rest 34% (the latters share being on a
consistently upward trend). (Refer Figures 1 and 2 for cargo volumes and growth rates for the major

and non-major ports.) Among the major ports, Kandla in Gujarat leads in terms of cargo volumes (handled 79.52 mmt in 2009-10) and is followed by Vishakhaptnam in Andhra Pradesh (65.50 mmt); among the non-major ports, most of the traffic is accounted for mainly by Gujarat (206 mmt) and Andhra Pradesh (40 mmt).

1 The

major ports include Chennai, Ennore and Tuticorn (in Tamil Nadu), Cochin (in Kerala), Kandla (in Gujarat), Kolkata (in West Bengal), Mumbai and Jawaharlal Nehru Port Trust [JNPT] (in Maharashtra), Mormugao (in Goa), New Mangalore (in Karnataka), Paradip (in Orissa), Vishakhapatnam (in Andhra Pradesh) and the recently added Port Blair (in the Andaman & Nicobar Islands) with effect from June 1, 2010. ICRA Rating Services Page 2

ICRA Rating Feature Figure 1: Cargo Volumes at Indian Ports

Indian Port Sector: Key Trends & Credit Challenges Figure 2: Cargo Growth Rate (yoy)
45%

900 800

40% 35% 285 203 202 30% 25% 20% 531 561 15%

700
600 500 400 300

155186

200
100

424

464519

2005-06 2006-07 2007-08 2008-09 2009-10

10% 5% 0%

-5%

2005-06

2006-07

2007-08
Non-Major Ports

2008-09

2009-10 TOTAL

Major Ports

Non-Major Ports

Major Ports

Source: Industry and ICRAs Analysis

Source: Industry and ICRAs Analysis

Figure 3: Cargo Profile at Major Ports 2009-10

In terms of cargo composition, Indias basket over the years has diversified from the traditional crude oil and iron ore to other cargo
POL
31%

Other Cargo 17% Containers 18%

categories including coal, petroleum, oil & lubricants (POL), and containers. In 2009-10, of

the total traffic handled at the major ports, POL

accounted for the maximum at 31%, followed by containers (18%); iron ore (18%), and coal

(13%), as Figure 3 shows. Going forward, ICRA expects cargo growth to continue on an upward trajectory over the medium to long Iron ore Coal term, given the ongoing and proposed 18% 13% Fertilisers & investments in the key user segments. The Fertiliser Raw Materials cargoes that are expected to drive growth 3% include (i) coal; (i ) containers; (i i) crude oil and Source: Industry and ICRAs Analysis POL; (iv) fertilisers; and (v) steel products. (refer Box 1). Volume of iron ore, which is one of the major export items at present would continue to be a function of policy and any restriction or ban on iron ore fines or lumps (like the recent one instituted by the state government of Karnataka), could impact ports and terminals, where the
share of iron ore cargo is high in the overall cargo mix. Traffic related to offshore exploration and

production activities and emerging trend of coastal shipping (for petroleum products and dry bulk cargo) would be other revenue contributors for ports.
Box 1: Key Cargoes expected to drive growth i. Coal: Thermal coal imports in the country are expected to increase significantly in quantum, in light of the
large number of ongoing and proposed power projects including the likes of TATA UMPP, Adani Power

Limiteds Mundra and other projects; Krishnapatnam UMPP and ventures proposed by JSW Energy
Limited; Andhra Pradesh Power Generation Corporation Limited; Tamil Nadu Electricity Board, amongst others. Besides, coking coal imports by a number of operating and proposed steel plants would be another

significant cargo contributor

ii. Containers: The current under-penetration of containerisation in the Indian market vis--vis global standards; high potential due to cost advantages and increasing trend of transhipment are expected to

keep the growth of container traffic in India robust over the medium to longer term
iii. Crude oil and POL: With a number of greenfield refineries in project stage and brownfield expansions being implemented at existing refineries, the import of crude oil and export of surplus petroleum products

iv.

are expected to be major contributors to overal cargo volumes Fertilisers: In light of the declining self sufficiency caused by stagnant production and increasing demand, import of both finished product and fertiliser raw materials in the country is expected to remain high over the medium term
Steel products: A number of mega steel projects have been proposed in the eastern part of the country,

v.

and once commissioned, export of steel products is expected to emerge as a significant incremental cargo

ICRA Rating Services

In M ionTon s ill ne

Page 3

ICRA Rating Feature

Indian Port Sector: Key Trends & Credit Challenges

According to the projections on cargo in the Eleventh Five-Year Plan (2007-2012), Indias port traffic
would cross the 1,000 mmt mark by 2011-12 which considering the recovery trend in cargo growth in 2009-10, appears plausible. However, on the supply side, constraints are likely to arise, considering the pace of implementation of projects under both Government and private initiatives as discussed in

the following section.

Progress on NMDP lags targets significantly:

The National Maritime Development Programme (NMDP) launched by the Government of India (GoI) in December 2005 is the GoIs most significant initiative to bring about an al -round improvement in the Indian maritime sector. With regard to the port sector, NMDPs scope encompasses initiatives to increase capacity at the major ports; to improve operations by modernising equipment, deepening channels, and implementing port connectivity projects; to enhance private participation in operational areas with the port trusts increasingly assuming the role of landlord ports; to improve service quality; and to enhance the sectors overal competiveness. A total of 251 projects2 at an investment outlay of Rs. 568 billion have been identified to augment the capacity of the major ports by 429 mmt, thereby taking the total beyond the 1,000 mmt mark by 2011-12. The first phase of this project was completed in March 31, 2009 while the second phase, which is currently under way, is scheduled for completion by March 31, 2012. In line with the intent of increasingly enhancing the role of the private sector in port investments, of the planned outlay, as much as 64% is to be contributed by the private sector while 22% is to come from the ports internal sources; the balance would come from budgetary support and other sources. As for implementation, the progress over the last 4.5 years has been very slow with only 13% of the planned capacity addition having been made and 10% of the projected capital expenditure having been incurred by March 31, 2010. Around 22% of the planned capacity addition is in the work-inprogress stage and 40% in the approval-to-award stage, while around 25% is still languishing in the preliminary planning stages (refer Table 1). Table 1: NMDPStatus Update
No. of Projects Estimated Outlay Capacity Addition Million Metric Tonnes 56 94 61 Funding Mix (Rs. billion) Budgetary Support 10 2 Internal Sources 16 36 7 Private Sources 36 99 22 Others 5 20 1

As on March 31, 2010 Projects completed Work in progress Approved but work yet to be awarded
Work firmed up and under process for

Rs. billion

50 74 16

57 165 31

approval Works under preliminary/planning stage TOTAL

29 82 251

116 199 568

110 108 429

10 23 45

19 45 123

84 124 366

3 7 35

Source: Ministry of Shipping, GoI

The systemic problems faced in the implementation of the NMDP initiative include: absence of proper PPP guidelines; lack of clarity on certain issues relating to the bidding process and qualification
criteria (which has led to litigation and rebids in cases); inadequacies in the model concession

agreement framework and the tariff setting principles under TAMP; protracted bidding-to-award
process; and hurdles in land acquisition and in obtaining clearances. The Ministry of Shipping (MoS) has of late made efforts to improve the progress of NMDP and has awarded 13 projects in 2009-10 as against nil in 2008-09. However, given that many of the procedural chal enges still persist and there is a significant backlog of projects, achievement of the planned targets appears unlikely within the stated

timelines. While on a relative basis, service standards at the major ports would improve as some
progress is made on capacity expansion, mechanisation of facilities and such other parameters, the

pace and extent of mismatch between what is required and what actually gets added is likely to result in the major ports continuing to face significant operating constraints. This in turn may be expected to cause a spil -over of cargo to the operational non-major ports that are better placed in terms of infrastructure and capacity availability.
2

Originally there were 276 projects, but of these 25 entailing a total investment of Rs. 60 billion were

subsequently dropped.

ICRA Rating Services

Page 4

ICRA Rating Feature

Indian Port Sector: Key Trends & Credit Challenges

With the NMDP fast approaching its 2011-12 deadline, the MoS has recently proposed a New Perspective Plan for the maritime sector with a 10-year horizon running up to 2020. The new plan
would have within its ambit year-wise projects for: stimulation of capacity expansion and growth of the maritime sector; dredging mechanisation; modernisation of major ports and non-major ports besides

supplementary projects for port development from other infrastructure ministries like those for roads,
railways, and inland waterways. For this purpose, a sub-group and a core working group have been

set up by the MoS, which will submit its recommendations in the near term.

Encouraging trend seen in private greenfield port ventures, but challenges remain:
Post-liberalisation, a number of domestic players3 as well as foreign entities4 entered the Indian port
sector, encouraged by the favourable business potential and the investment environment provided by some States. Among the private sectors notable contributions to the Indian port sector are the

Mundra port (which, by cargo volume, ranks among the larger ports in the country) and Pipavav port,
both of which are in Gujarat. The greenfield ports commissioned in the recent past (2008-09 and onwards) include the ones at Krishnapatnam and Gangavaram in Andhra Pradesh, Karaikal in Puducherry, and Jaigarh in Maharashtra, all of which have commenced their first-phase operations and have lined up large-scale subsequent expansion phases with mega capacities. Some of the greenfield port ventures expected to be commissioned in the near term include the Dhamra port in Orissa; Adani (Petronet) Dahejs solid cargo port terminal in Gujarat; Dighi port in Maharashtra; and Gopalpur port in Orissa. According to industry sources , at present around 24 greenfield port projects entailing a total investment of Rs. 587 bil ion are planned for commissioning between 2016 and 2025.
5

These would cumulatively add a capacity of 835 mmt, if implementation progresses as planned. Most greenfield port ventures are characterised by high capital costs (refer Figure 4) owing to their superior
operational characteristics (deep draft Figure 4: Comparative Capital CostNew Ports vs. Existing Ports (Bulk Cargo)

and mechanised handling of specific cargoes). The capital costs being high,
the tariffs of the upcoming ports are
Mormugao Ennore
Gangavaram- Phase I

168

564 671 914 765 1,188 754

likely to be on the higher side as compared with the established older ports. However, with their higher operating efficiency, the new ports are also expected to offer cost savings to users by way of optimisation of integrated logistics cost (includes
ocean freight, port handling and inland

Karaikal
Adani Petrone (Dahej)

Dhamra
Krishnapatnam

200

400

600

800

1,000

1,200

In Rs./Metric Tonne/Annum New Ports Existing Ports

transportation costs). Further, most of the greenfield ports enjoy fairly

favourable fiscal terms (viz. low

Source: Industry Data and ICRAs Analysis

revenue share commitment), which gives them the flexibility to offer competitive tariffs. The success stories notwithstanding, greenfield port ventures in India continue to be besieged by
problems at various stages with the result that the rate of proposal-to-implementation conversion is low, there are delays in the development and implementation phase, and problems are faced in the early post-commissioning stage. Some of the problems faced in the initial (pre-construction) stage

include delays in the actual award of the project even after the memorandum of understanding (MoU) has been signed; lack of clarity in the qualification and bidding criteria (has led to litigation in the past);
inability to obtain the requisite clearances on time and financial constraints of the promoters. Delays in implementation phase typically arise on account of problems faced in land acquisition; issues of local protest and resistance; environmental concerns while post commissioning, upscaling of cargo may be affected by delays in connectivity projects viz. road and rail network. Resolution of these issues

remains critical for the realisation of the full potential of private sector enterprise in port activity.

Including the Adani Group, the Navyuga Group, Marg Construction, the JSW Group, Gammon Infrastructure, and Reliance.
3

Including DP World (earlier P&O Ports), the AP Moller-Maersk Group, PSA Corporation, and Portia

Management Services. 5 India Infrastructure Research ICRA Rating Services

Page 5