Trends and Outlook – Indian Infrastructure

The maritime sector plays an important role in India’s foreign trade, accounting for about 95 per cent of the country’s trade by volume and 70 per cent by value. The sector has been under pressure for years, due to a weak global environment, falling freight rates, contraction in imports and exports, along with issues on the domestic front.

While the sector will remain extremely dependent on global trade cycles, increased government support in terms of announcements of new policy measures is expected to provide a more conducive environment for stakeholders, going forward. In recent years, the government has launched various policy measures across the maritime chain – ports, coastal shipping, inland water transport (IWT), and ship building, repair and breaking – to promote sector growth.

Steps have been taken to give greater autonomy to boards of major port trusts, promote the ease of doing business at ports, relax cabotage restrictions for container transshipment ports, revamp the Merchant Shipping Act, 1958, promote funding for the shipbuilding industry and the development of inland waterways, etc.

The past two years have also been marked by the launch of Sagarmala, the most ambitious programme for the maritime sector to date. Its implementation aims to cut logistics costs, create new infrastructure, aid in employment generation, etc. While the roadmap for the programme is still evolving, that progress has been made towards project implementation is quite evident. With the launch of the National Perspective Plan in April 2016, Sagarmala has moved from the planning stage to the implementation stage. While these initiatives are yet to turn investors bullish, there have certainly been gains on the capacity addition and modernisation fronts.

Indian Infrastructure takes a look at the key trends in the maritime sector as well as the future outlook…

Cargo traffic at Indian ports grew at a compound annual growth rate (CAGR) of 4.95 per cent between 2012-13 and 2016-17, to reach 1,133 million tonnes (mt). The growth was led by non-major ports, which witnessed a traffic CAGR of 5.76 per cent, compared to 4.3 per cent for major ports.
In 2016-17, major ports handled 647.43 mt of traffic, registering a year-on-year growth of 6.79 per cent, as against 4.32 per cent during 2015-16. The growth in traffic at major ports was attributed to an increase in iron ore, petroleum, oil and lubricants (POL), and container traffic. Fertilisers and coal witnessed negative growth rates of -23.88 per cent and -15.53 per cent respectively.
In 2016-17, traffic for non-major ports stood at 485.33 mt, registering a year-on-year growth of 4.18 per cent as against a negative growth of 1.09 per cent in 2015-16. POL had the largest share of 38 per cent in the total traffic at non-major ports, followed by coal at 27 per cent.
In terms of capacity addition, major ports set a record with an addition of more than 100 mt in 2016-17. With this, the total capacity at major ports crossed the 1 billion tonne mark, reaching 1,065 million tonnes per annum (mtpa) as of March 2017. Greenfield non-major ports saw tardy progress, while a few operational private ports witnessed some capacity addition. For instance, the non-major private port at Mundra commissioned its fourth container terminal, and increased its capacity to 5.5 million twenty-foot equivalent units (TEUs).
Private investment accounted for over 80 per cent of the total investment in the port sector during the Tenth and Eleventh Plans, and in the Twelfth Plan, the share is estimated at over 85 per cent. As of March 2017, 33 public-private partnership projects entailing a total investment of Rs 178 billion have been completed at major ports, and have added a capacity of 277 mtpa.
So far, port development in the country has been primarily restricted to the west coast. In recent years, however, ports on the east coast have witnessed much higher growth rates in traffic volumes. Between 2011-12 and 2015-16, traffic at east coast ports such as Dhamra, Krishnapatnam and Kamarajar increased at a CAGR of 31 per cent, 23 per cent and 21 per cent respectively.
Ports are exploring new business areas to diversify their portfolio and reduce business risks, with roll-on, roll-off and liquefied natural gas terminals, smart port cities, and port-based special economic zones emerging as new areas of growth. Of the total target of 91.5 MW of solar power projects at the 12 major ports, projects totalling 14 MW are operational at eight major ports.
On the shipping front, as of July 31, 2017, India’s shipping tonnage comprised 1,345 vessels of 12.25 million gross tonnage (GT). Of these, 426 vessels of 10.76 million GT were involved in overseas trade, while the remaining 919 vessels of 1.50 million GT were engaged in coastal trade.
Dry cargo liners dominate the fleet composition with 741 vessels, but their contribution to the total tonnage (in terms of GT) is only 19 per cent. These are followed by oil tankers with 150 vessels, with their contribution to total tonnage at 53 per cent.
In terms of age, as per the latest information available, as of December 2016, while 18 per cent of the vessels are 0-5 years of age, a large part of the fleet (40 per cent) is over 20 years old.
With respect to IWT, the combined traffic on inland waterways (three national waterways [NWs] and two state waterways) increased at a CAGR of 32.7 per cent, from 30.06 mt in 2014-15 to 52.93 mt in 2016-17.

Outlook

The long-term outlook for the sector remains positive, backed by a series of government initiatives being taken. These include the formulation of the Central Ports Authorities Bill to give more autonomy to major ports; the removal of 13 archaic rules under the Merchant Shipping Act, 1958; the setting up of a dedicated institution, namely, Indian Port Rail Corporation Limited, for port-rail connectivity projects; the introduction of new dredging guidelines; the relaxation of the cabotage law; the declaration of 106 new national waterways; cabinet approval for the allocation of 2.5 per cent of the Central Road Fund for the development and maintenance of NWs; grant of infrastructure status to the shipbuilding segment; among others. The government is also in the process of reviewing the model concession agreement.
The goods and services tax, rolled out from July 1, 2017, is likely to have a positive impact on reducing logistics costs in the country.
The launch of Sagarmala with its focus on “port-led development” instead of only “port development” has brought optimism among stakeholders with the plethora of opportunities that it offers. As part of the programme, the focus is not only on capacity creation. Equal emphasis is being laid on mechanising port operations, developing smart and sustainable ports, providing adequate connectivity and deeper draught levels, developing coastal and IWT, and promoting the ease of doing business. Overall, 415 projects worth Rs 8 trillion are planned to be undertaken as part of Sagarmala.
However, the programme’s timely and successful execution requires close coordination between the the central and state governments. Also, a major role is required to be played by the private sector in programme implementation, and this, in turn, requires addressing various regulatory and structural issues hampering the sector.
Land acquisition is a major concern, especially for greenfield projects. Ports at Rewas (Maharashtra), Machilipatnam (Andhra Pradesh), Astaranga (Odisha), etc., are yet to take off due to delays in land acquisition.
Contractual issues are also a key are of concern. Deadlines of a few significant projects have been extended several times due to a lack of investor interest.
The requirement of multiple approvals, and sometimes the inordinate delays in securing them, has led to significant time and cost overruns in the past. Traffic congestion at ports, strikes, etc., increase waiting times for vessels at ports which, in turn, adversely affects shipping lines’ schedules and thus their profit margins. Limited draught capacity of ports to accommodate large vessels is another key concern. Further, a coordinated approach to capacity addition is needed, as uptil now the focus has been on the west coast. Looking eastwards is the way forward.
The lack of adequate cargo evacuation facilities at ports has resulted in the increased cost of logistics for operators. Roads continue to be the dominant mode for cargo evacuation, despite being costly and congested. The share of coastal shipping and IWT in total freight movement in the country remains at less than 10 per cent. For coastal shipping to be viable, the multimodal chain as a whole needs to be cost-effective vis-à-vis the unimodal road or rail.
The strong government intent to bring about a sea change is expected to offer a more favourable environment to stakeholders. However, by definition, the sector remains extremely dependent on global trade cycles. A supportive policy framework can help mitigate the impact of external pressures to some extent. However, revival of global and domestic economic activity will be crucial for sector growth.