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Ports &TerminalsMay2012INDIAN PORTS: THE NEED FORCAPACITY AND INVESTMENTThis article first appeared in the May 2012 issue of Port Strategy and is reproduced with their kindpermission. www.portstrategy.comIntroductionLike many of the dynamic and fast growingworld economies, India is taking a close lookat ways in which it can develop and expandits ports to cope with increasing demands.Congestion and capacity constraints at someof the key Indian gateways have led to pressurefrom the shipping industry and customers forthe Indian government to open up the sectorand develop suitable infrastructure for what isnow the world’s third largest economy. Muchhas already been done. The Indian governmentis already trying to co-ordinate new portdevelopment in key strategic hubs and toencourage private investment to ensure thatthese key elements of infrastructure allow thecountry to keep apace with the demands of itseconomic development.There are serious challenges in any project,particularly for a country of India’s size andcomplexity as the world’s largest democracyand with its federal and state governmentsystem. Anyone who has spent any time inIndia, however, will know that the willingness toimplement the development is there and that,with patience and determination, the changesare taking place. Ports generally worldwide arekey investment targets for private investorsand financial institutions, particularly in aneconomy like India, where it is clear that there isa need for more development to cope with bothimport and export demand. We see a numberof investors looking at port projects in Indiaand suspect that this trend will only continueparticularly as intra-Asian trade continues togrow and given India is one of the key South-Asian markets.Signs of capacity constraintThe country’s 7.8% annual economic growthplaces India as the world’s third largesteconomy, after the US and China, yet in 2011 itis ranked only 13th and 21st globally for importsand exports, respectively. Indian ports handled9.7 million TEU in 2011, which represents just8% of the global benchmark ratio for economicoutput. This imbalance is partly attributable to

port capacity and congestion issues,which have stifled trade growth.Federal ports make up the majorityof the major ports in India, with thefederal government owning 12 ofthe country’s 13 major ports. Thesefederal ports are working at 85%capacity, where 70% is consideredto be ideal. There is a highconcentration of activity at Mumbai’sJawaharlal Nehru Port (JNPT), thelargest in India for solid cargo, whereit is working at over 100% capacity.Capacity constraints are furthercompounded by India’s 25% levelof containerisation, which is farbelow the global average of 60-70%.Furthermore, the average time forclearing import/export cargo at portsin India is about 19 days, comparedto 3-4 days in Singapore.As shippers seek alternative cargogateways, a spill-over of cargo fromfederal ports to medium-sized, nonfederalports is occurring. Thesenon-federal ports tend to be betterplaced in terms of infrastructure andcapacity. For example, the spilloverhas allowed the Bombay listedGujarat Pipavav Port Limited (GPPL)to take on some of the surplus and toachieve it’s first full-year net profit of$11.6m in 2011.Current expansion by Indian portsAlthough increased capacity at nonfederalports will help to ease India’sport capacity constraints, capacityat the country’s federal ports alsomust increase if India’s congestionand capacity problems are to beresolved. Accordingly, various plansare in place to increase the capacityof federal ports from 670.13 milliontonnes in 2010-11 to 1,459.53 milliontonnes by 2019-20 and to increasethe capacity of non-federal portsfrom 390 million tonnes in 2010-11 to1,670.513 million tonnes in 2019-20.Specific examples of growthinclude plans to expand containerhandling capacity at JNPT (India’sbusiest container gateway) from4.32 million TEUs to 10.5 millionTEU in 3 to 4 years. JNPT has threeterminals- one is state-run while theother two are run by global terminaloperators. JNPT currently operatesat 100% capacity, however thestate-run terminal hopes to increaseproductivity by replacing its oldercranes with newer ones. There arealso plans to build a fourth containerterminal at the port, although it will bea smaller terminal with a containerhandlingcapacity of 600,000containers a year.Other examples of expansion includethe development at Mumbai Portof an offshore container terminal,the construction of an oil berth atJawahar Deep and a liquid cargojetty at New Pir Pau Pier, as wellas the development of offshoremultipurpose cargo berths.India also has plans to increase itscapacity to import liquefied naturalgas (LNG). India is the world’s sixthlargest LNG importer, and already hastwo LNG import terminals with a totalcombined capacity of approximately10 million tonnes per year. As partof the government’s plan to increaseimports of LNG, it has invested$1bn in a new floating LNG importfacility located off India’s east coast.The facility will convert LNG into agaseous state and will be capable ofstoring 5 million tonnes of LNG peryear. This project is expected to becompleted by 2013.Private sector investmentIt is estimated that infrastructureinvestment of $20bn is needed toincrease India’s container capacityto a level sufficient to accommodatethe country’s economic growth.Private sector involvement will becrucial to achieving such a high levelof investment. Fortunately, Indianregulation encourages private sectorinvolvement by allowing 100%foreign direct investment (FDI) inthe port sector. India is, therefore,currently dominated by three globalterminal operators: DP World, PSAInternational and APM Terminals.Both DP World and PSA Internationaloperate neighbouring terminals andports across the coast, while APMTerminals’ presence is strong in thenorth west of the country.Investment from sources beyondthe three major global terminaloperators is expected to increase inthe coming years. For example, inFebruary 2012 the European Port ofAntwerp (Europe’s second largestport by cargo tonnage) signed amemorandum of understandingwith the Association of MultimodalTransport Operators in India.Presumably, this alliance will createan important Indo-European tradelink between Indian ports and theBelgian port, which will enable Indiancarriers and shippers to forwardgoods more easily to and fromEurope.Another example of investment fromEurope includes the investmentof Erdene Capital in the EnnoreContainer Terminal. As reported byLloyd’s List on 2 April 2012, ErdeneCapital, a London-based Indianports and logistics infrastructureinvestor, will work with a consortium02 Ports & Terminals

led by Spanish port operator, GrupMaritim TCB, to build and run anew container terminal in the port ofEnnore. It is expected that the projectwill be one of India’s largest singleoperatorcontainer terminals and willenable Ennore port to serve as theindustrial heart of the southern Indianstate of Tamil Nadu.Private sector investment clearly isoccurring in the Indian ports sector.However, more investment is requiredto achieve the $20bn in infrastructureinvestment needed to match India’sport capacity to its economic growth.Challenges facedIn addition to the need to securesubstantial investment in portinfrastructure, the Indian ports sectorwill face several other challengesto increasing port capacity andefficiency.Regulatory reformWhilst many of the current policiesof the central and state governmentsof India vis-a-vis the port sectorare generally investor friendly, likeany system there are ways in whichit could be improved. There is nodoubt that investigating ways inwhich the approval process can beaccelerated would help increaseinvestor confidence (and possiblyeven appetite), as well as reducethe backlog of projects which arecurrently putting planning targets atrisk. In the longer term, increasingcompetition with new terminals willhelp reduce capacity constraints andlead to increased efficiencies at all ofthe individual terminals.In our experience the Indian legalsystem is a solid basis upon which todo business and holds no concernsfor investors or project financiers(domestic or foreign). This shouldnot be underestimated in a globalmarket where competition for fundingis increasing as liquidity in many keymarkets still remains scarce.Value added servicesThere is a real need to providethose involved in getting cargoto and from ports with a range ofvalue added services. Many newport developments include plansfor facilities such as distriparks,investment in infrastructure to providebetter hinterland connectivity andquicker transit routes. Studies alsoshow that each day saved in thecustom clearance of cargo saves0.5% of ad-valorem tariff. Providingthese value added services willattract investment in the Indianports sector whilst simultaneouslyimproving efficiency and ultimatelyincreasing capacity.Reduction in logistics costsThere is also a need for a reductionin logistics costs in the portssector. Currently, nearly half ofIndia’s cargo is internationallytranshipped. Transhipment-relatedcosts add to the already highinternal logistics costs, which arecurrently around 14% of GDP.When compared to logisticscosts of 5%-9% of GDP in manydeveloped nations, India’s costshighlight serious inefficiencies.Poor road infrastructure, adisorganised trucking network, lowcontainerisation levels (as comparedagainst the global average) andlengthy customs clearance times allcontribute to India’s high logisticscosts and must be addressed inorder to increase efficiency.The outlookThere are positive signs of progressin India’s ports sector and thepotential for growth and developmentis enormous. India is well-positionedas the world’s second fastest growingmajor economy, and the country hasemerged from the global economiccrisis relatively unscathed. Privatesector investment and expertiseis keen to play its part. However,in order to support its growingeconomy and to capitalise on itsglobal position, India must continueto address the capacity constraintsfacing its port industry. Furtherinvestment in and development ofthe ports infrastructure, along withinvestor-friendly changes to theregulatory regime, will be key toimproving the overall performance ofIndia’s ports.For more information, please contactAlistair Mackie, Partner, on+44 (0)20 7264 8212 oralistair.mackie@hfw.com, or yourusual HFW contact.Ports & Terminals 03

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