The Nhava Sheva international container terminal in Mumbai, operated by DP World, is raking it in, says a study posted on the government's infrastructure website. The operator could make undue gains of over Rs 5,800 crore in reduced royalty payments alone over a 30-year period. Here’s why it is an example of how not to structure PPP deals.

This civil servant is a part of IIM G, a ginger group set up by alumni of Indian Institutes of Management in the bureaucracy to improve the functioning of government. He is the chief financial officer of a government entity, which we shall not name because it is not associated with the study. The author says it is a voluntary effort in the public interest.   

Bharat Salhotra, author of study said, “As part of our initiative to improve functioning of the government, we met the pay commission, the adminstrative reforms commission and some of us met the Cabinet Secretary who suggested we study the port sector, the infrastructure side of it.” 

The study posted on the website www.infrastructure.gov.in analyses changes made to the deal, after the concession was awarded. The charge with the gravest implication for port users is with regard to treatment of royalty. Royalty should actually be a charge on profits, but in this case, it was allowed as cost.

“If bidders had known that royalty would be allowed as pass through, then anybody could have bid any amount. The contract would have gone to those who charged port users the most. That would have been absurd and against the tone and tenor of PPPs,” Salhotra said.

Not just that, this change was given effect retroactively for five years till 2005, and for an extra year as well. And instead of allowing 70% of the royalty to be passed through, as per a department of shipping directive, the entire amount was allowed to be charged to users. This would result in huge gains over a 30-year period.

Said Salhotra, “The total implications, without discounting, because the discounting factor itself could be a subject of debate, is Rs 5,800 crore of undue gains.”

The study says because tariffs were not reviewed in time, the concessionaire was able to charge 16% higher tariffs for a five year period, despite a rise in container traffic. The equity component was increased, and this translated into a 104% effective return on the originally proposed equity for 2004-05, against 20% allowed. The author also suspects that much of the operational savings were due to increase in traffic volume, not on account of efficiency, and the concessionaire should not have been allowed to keep them.

As a result of these changes, the Nhava Sheva international container terminal earned a Rs 1600 crore return, Rs 950 crore should have been inadmissible. This is a 60% return on revenue of Rs 2500 crore over an eight-year period.

The study faults the tariff authority for major ports, the Department of Shipping and JNPT for failing to guard the public interest. In the 1990s Enron gave fast track power projects a bad name. Deals like these could tarnish the image of public private partnership projects.