Date:21/02/2005 URL: http://www.thehindubusinessline.com/2005/02/21/stories/2005022100340600.htm

Back Dredging, port projects — Alternative models

P. Manoj

One of the suggestions at the recent Indo-US Summit on Partnership in Building India's Infrastructure was to adopt the annuity method for dredging works at major ports. This involves payment of a fixed semi-annual sum to the project operator to compensate for the capital costs, operation and maintenance expenses plus a certain percentage of returns, and frees port trusts from the burden of buying equipment and procuring the service from a private entity.

TWO interesting suggestions were made at the `Indo-US Summit on Partnership in Building India's Infrastructure' in Delhi on February 9 and 10. One, to adopt the annuity concept for dredging works (both capital and maintenance) at major ports and, two, to have a variable revenue share for building and developing cargo-handling terminals at major ports.

Speaking at the Summit, Mr A Balasubramanian, Vice-President, IDFC Ltd, said the Shipping Ministry should consider taking up dredging works at major ports through the annuity method. The National Highways Authority of India had adopted this approach for highway projects with private investments.

The annuity method involves payment of a fixed semi-annual sum to the project operator to compensate for the capital costs, operation and maintenance expenses plus a certain percentage of returns. The private operator is paid the annuity amount if he operates and maintains the facility as per standards specified in the concession agreement. Under this concept, the private operator quoting the lowest annuity amount is awarded the contract.

According to Mr Balasubramanian, adopting the annuity method for dredging works would free the port trusts from the burden of buying equipment and procuring the service from a private entity. "Besides, under this concept, the payments need to be made only in half-yearly instalments to the project operator and that too if he meets certain specified standards on operation and maintenance laid down in the concession agreement." Mr Jayesh Desai, Director, Ernst & Young, said that the Government should now think in terms of a variable revenue share, which increases with each passing year. As per the current bidding norms, the private operator willing to share the highest percentage of his annual operating gross revenues with the port trust/government is awarded the contract for operating the facility at major ports.

"Currently, the Government is bidding out projects at major ports on the basis of a revenue share which remains constant through the concession period. This should be changed in favour of a system where the revenue share is lowest during the initial years and then moves to a higher revenue share as the project progresses," Mr Desai said.

A lower revenue share percentage in the initial years of the project would provide a comfort to the investors particularly in the beginning when the facility is establishing itself. A variable revenue share system has been adopted by the Orissa Government for developing the Dhamra minor port for which the contract has been awarded to a consortium of Larsen & Toubro and Tata Steel. In this case, the revenue share has been pegged at 10 per cent during the initial years of the licence agreement and increases to 12 per cent and later to 15 per cent as traffic builds up.

The Andhra Pradesh government adopted this system while awarding the Kakinada port project to Kakinada Sea Ports Ltd wherein the revenue share has been fixed at 20 per cent for the first five years and 22 per cent for the balance period of the concession agreement spanning 30 years.