Published Editorial

The dragon way

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The Financial Express

by

Abhaya Agarwal

Partner - Infrastructure practice & PPP Leader
EY

Contributed by:

Amit Goyal
EY

China, one of the largest and fastest growing economies, is primarily driven by its investment-oriented growth. Its continued investment in physical infrastructure has sustained high economic growth. Its competitiveness in global manufacturing has created a vibrant domestic market for freight transportation, through the ports and shipping sector.

In contrast, India, though the third largest economy with a strategic location in global trade, is relatively under-represented, with a global exports share of just 1.44% against China’s 10.34% in 2010. The investment levels in India in absolute terms have increased but the growth rate in investment has declined drastically in the last two-three years.

China has a coastline of 14,500 km, which houses 30 major ports, whereas India has a coastline of 7,500 km and houses 13 major ports. However, China has five port operators amongst the top 20 port operators in the world, while Indian port operators do not have a presence in the rankings.

In the period FY07-11, traffic increased at major ports (constituting 60% of total traffic in FY 11) in India from 463.8 million tonne to 570 mt, an annual increase of 5.3% while capacity increased from 504.7 mt to 645 mt, a CAGR of 6.3%. Although, the capacity increase was higher than the traffic growth rate, the average utilisation at major ports was 90%, much higher than the international average of 70%.

Chinese initiatives

With the view to enhance port construction, China gave up its monopoly and its five-year plans. Some of the policies adopted were: preferential treatment to overseas partners, including docking fees high enough to generate project incomes; joint venture agreements for 30 years or more; income tax and custom duty exemptions; and floating development banks to support key state infrastructure projects. It also overhauled its archaic shipping laws of 1950 and incorporated several international conventions on the carriage of cargo, passengers and their luggage, collision, multi-modal transportation and salvage, etc., so as to bring the maritime activities in the framework of a sound legal system and safeguard the rights of all parties.

China emphasises on building links to the ports by expanding connections between ports via inland transportation—by highways, railroad lines and river ways to the hinterland. It has the most developed inland waterways transport sub-sector in Asia with more than 200 inland ports. This mode of transport has been growing in recent years, given China’s inland transport development strategy. China plans to invest $30.6 billion during 2011-2015 on various river transport projects. China also channelled billions of dollars into the construction of its ports along the coasts and major rivers.

India’s focus

Unlike China, India is relying heavily on the private sector for investment. The private sector is expected to fund more than 80% of the investments in the sector. This seems ambitious given the experience of the public-private participation (PPP) projects in ports. Private participation in India is plagued with many challenges such as an unfavourable tax structure, flawed model concession agreement (MCA) guidelines and rigid Tariff Authority for Major Ports (TAMP) regulations. Further, financing remains a critical issue. Also, India has no comparable achievement despite having major rivers.

Lessons

India can learn from the following Chinese polices to develop its ports and shipping sector:

  • A focus on reforms and liberalisation that enlist private sector co-operation;
  • Emphasis on sustained development of the port and shipping industries with a focus on use of energy conservation and emission reduction technology;
  • Creation of deeper harbours to accommodate large and efficient vessels;
  • Building scale of operations (combined throughput at major Indian ports barely matches that of Shanghai alone), as opposed to fragmented port operations in India;
  • Coordination of berth side development (including installation of cargo handling equipment) with marine side development (including enhancement in channel depths);
  • Leveraging of seaports as a vital link for economic interaction between coastal and inland regions and the integrated development of port infrastructure; and
  • Planning for port connectivity projects in tandem with port development.

The rising number of port development projects being planned and executed across the world highlights the impact of global trade on a country’s existing infrastructure. Also, the growing number of larger and more efficient vessels has led to a demand for deeper harbours; in fact, it is the leading driver of many port expansion projects. New shipping routes are being formed, creating infrastructure opportunities for countries that export commodities.

The efforts to create and upgrade port infrastructure have to be integrated with the development of supporting infrastructure such as inland waterways, rail and road links so that goods can be transported both for exports and domestic consumption.