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Addressing regulatory and development risks key to draw funding to port sector

India's maritime sector is intricately linked with its economic activity and has been a critical contributor to its competitive position in global trade.

Updated: Jul 20, 2012, 11.53 AM IST
By Sushi Shyamal

India's maritime sector is intricately linked with its economic activity and has been a critical contributor to its competitive position in global trade.

India has a coastline of more than 7,500 km and around 95% of the country's external merchandize trade by volume, and 70% by value, is transported through the maritime sector.

India's port infrastructure constitutes 13 major ports and 60 non-major operational ports. Major ports come under the Centre's jurisdiction while the non-major ports are governed by states. The total combined capacity of major and non-major ports is just over 1,150 million tonne as of December 2011. In the last five years, most major ports have operated at more than 90% capacity, exerting pressure on the country's limited infrastructure .

This has necessitated the speedy development of non-major ports resulting in the addition of fresh capacity and increasing the share of minor ports from 29% in FY07 to 40% in FY12.

On the east coast, the capacity built up at non-major ports is mostly for bulk commodities like iron ore and coal catering to export-import trade while the west coast has witnessed capacity addition for containerised cargo mainly originating from the hinterland of Gujarat, Maharashtra and the National Capital Region.

Port traffic in the country is expected to grow at a CAGR of 12% to reach 2,500 million tonne by FY20. Traffic at non-major ports is expected to grow faster and its share in overall port traffic is anticipated to increase to about 50% by 2020.

Although the sector has witnessed a significant growth in cargo traffic, an optimum level of operations has not been achieved due to constraints related to capacity , high-cost structures, inefficient handling of cargo, low productivity, inadequate draft and inadequate hinterland connectivity .

To address these limitations, it is imperative that the sector be made attractive for investments . The Ministry of Shipping introduced a detailed 10-year development plan for the sector in January last year. A total of 352 projects have been identified for implementation under the Maritime Agenda 2010–2020.

Government has also recognised the importance of privatisation to increase productivity and efficiency in the segment. Furthermore, it has allowed FDI of up to 100% under automatic route and 100% income tax exemption for 10 years for investments .

A funding of $33 billion would be required from the private sector in the current decade to triple the capacity at ports. Private equity investments have been observed in a string of single-port assets, rarely seen in other infrastructure assets such as roads, power and urban infrastructure.

A single-port asset can scale up to handle large volumes of cargo and earn sizable revenues and profits which is critical for approaching public markets by way of IPO and giving an exit to private equity investors. The sector has witnessed investments from strategic players like DP World, PSA, APM Terminals, Port of Antwerp, OHL, Grupo Maritime and Israel Ports over the last few years.

With the recent ban on export of iron ore and a slowdown in coal imports, there is increased competition among eastern ports to maintain utilisation. This trend leaves a window open for a consolidation among a few of the assets by the strategic players.

On the west coast, there is a scope for creating additional capacity by strategic players that can be targeted for handling containerised cargo from Africa and parts of West Asia and North Africa regions.

It can be clearly inferred that due to the sheer size and scale of investments envisaged in Infrastructure sectors and significant capacity constraints seen owing to huge demand-supply gaps, the growth in the infrastructure sectors appears to be reasonably high.

Several transactions have been completed in the power and the highway sector and to a limited extent in ports, airports and urban infrastructure space by both strategic and large private equity investors.

We can continue to see such growth trends once the high risk perception on these sectors primarily due to regulatory and development risks gets mitigated within the budgeted timelines as currently it is taking much longer than envisaged.

The author is partner , infrastructure practice , Ernst & Young . JigneshPanchal , senior professional , Infrastructure practice with Ernst & Young , contributed to this article . Views are personal

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