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First private container terminal NSICT wants to change course

      10/08/2019

Nhava Sheva International Container Terminal Pvt Ltd or NSICT, India’s first private container terminal at a central government-run port, has won backing from an arbitral tribunal to switch to a revenue-share model from a royalty format.

NSICT is one of the two container terminals run by the Dubai-government owned DP World Ltd at Jawaharlal Nehru Port Trust (JNPT), India’s biggest container gateway.

The arbitration proceeding was initiated by NSICT as per the clauses written into the concession agreement signed with JNPT in 1997 for a 30-year period.

An arbitral award can be enforced only if both the parties to the dispute agree, otherwise, the aggrieved party can challenge the award in court and get a stay order.

Multiple sources confirmed the arbitral award, but NSICT and JNPT did not respond to queries sent for seeking comment. “Unless both the parties agree, it cannot be done. I don’t know whether JNPT will agree to it because every year the royalty to be paid by NSICT rises by a certain percentage,” a consultant who tracks the sector closely said.

“Besides, the concession was awarded to NSICT based on the royalty model and a shift to revenue-share mid-way through the contract could attract legal challenges from the entities who lost out on the tender,” he said.

The earliest container terminal privatisation contracts, such as the one for NSICT, followed the royalty model. The terminal operator has to pay a certain royalty specified in the contract on each container handled at the terminal to the government-owned port, which rises annually.

Since then, the central government-owned ports followed the revenue-share model wherein the bidder willing to share the most from its annual gross revenue with the government-owned port trust wins the contract.

NSICT was hit by the peculiar nature of the contract — royalty rates that were low in the first ten years of operations and rising substantially over the balance period, with no concomitant increase in rates. Low rates and rising royalty have hurt the viability of NSICT.

According to the terms of the NSICT contract, the royalty was set at Rs 47 per twenty-foot equivalent unit (TEU) for the first year of operation and for the 30th year (last year) of operation in 2027, it is fixed at Rs 5,610 per TEU.

Interestingly, the model concession agreement (MCA) was revised by the Narendra Modi government in 2018 which, among other issues, reverted to the royalty model for award of port contracts.

“The enforcement of the arbitral award will depend on what view JNPT takes because under the new model concession agreement, the revenue-share model was discarded in favour of the royalty per TEU model. Therefore, under the changed circumstances, whether they will move to revenue share and whether JNPT will agree to that remains to be seen,” the consultant said.

The arbitral award, according to the consultant, has also lost its relevance in the wake of the new tariff setting guidelines framed by the Shipping Ministry earlier this year for terminals such as NSICT.

Under the new norms, which follows a different formula for setting rates, the earliest cargo terminals will get a tariff which is higher than the royalty, and takes care of the cost and profit.

“If they submit a proposal for rate revision to the regulator, they will get a higher tariff computed as per the new norms,” the consultant said.

The volumes handled by NSICT has been steadily declining since 2012 when TAMP, the rate regulator for major ports, notified a rate cut of 27.85 per cent at the facility. The rate cut was stayed by the Mumbai High Court.

Besides, from 2012, NSICT is contractually mandated to handle a minimum guaranteed volume of 600,000 TEUs till the concession ends in 2027.

The volume reduction became more pronounced after parent DP World opened a second terminal in 2015 which sits adjacent to NSICT.

The rate structure under which the new terminal operates is “more commercially beneficial” than NSICT, nudging DP World to divert business to the second terminal to reduce losses at NSICT, yet adhering to the contractual minimum volume stipulations.