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Chidambaranar port challenges PSA terminal arbitration award

LiveMint logoLiveMint 06-06-2014 P. Manoj

Bangalore: Union government-owned V.O. Chidambaranar port in Tamil Nadu has challenged an arbitration tribunal award that backed the demand made by Singapore’s PSA International Pte Ltd to move to a revenue-share format from a royalty model for the residual period of its container terminal contract at the port that ends in 2028.

“The port has filed an appeal in the Madras high court against the arbitration tribunal award,” a spokesman for the port, said.

PSA is the world’s top container port operator by volumes.

PSA Sical Terminals Ltd, the entity that has run the container terminal at Chidambaranar port (formerly known as Tuticorin port) from 1998, is 62.5% owned by PSA International, a unit of Temasek Holdings Pte Ltd, Singapore’s state-owned investment firm. The terminal has been dogged by tariff issues for many years.

PSA could not be reached immediately for comment. Apart from the facility at Chidambaranar facility, PSA runs a container terminal at Chennai port and won a contract recently to build a facility at Jawaharlal Nehru Port near Mumbai, involving an investment of `7,915 crore.

The arbitration award, passed on 14 February, says that PSA Sical Terminals should be allowed to move to a revenue-share format from a royalty model by adopting the revenue-share percentage of 55.19% quoted by ABG Container Handling Pvt. Ltd in September 2012 for a new container terminal, the second, at Chidambaranar port.

PSA had argued before the arbitration tribunal that due to the earlier rate cuts ordered by the port tariff regulator, the commercial viability of the terminal has been adversely affected and, therefore, it is entitled to have the contract amended. This view was upheld by the arbitration tribunal. Chidambaranar port was against amending the contract by allowing PSA to switch to a revenue-share format.

The earliest container terminal privatization contracts such as the one at Chidambaranar port followed the royalty model. The terminal operator had to pay a certain royalty specified in the contract on each container handled at the terminal to the government-owned port. The royalty rises by about 20% every year in July till the end of the contract.

Since then, Indian government-owned ports have switched to the revenue-share model for port privatization contracts. The bidder willing to share the most from its annual revenue with the government-owned port wins the contract.

In 14 years since starting operations, PSA made three attempts to raise rates for the services provided at the terminal, but each time the tariff regulator for the Union government-controlled ports slashed rates by 15% in 2002, 54% in 2006 and 34% in 2008.

PSA did not implement the rate cuts, securing stay orders from the Madras high court. In effect, PSA is operating the facility with a capacity to handle 450,000 standard containers a year at rates approved in 1998, when it started out on a 30-year contract.

In October 2011, PSA secured a stay from the district court in Tuticorin to freeze the annual royalty it is contractually mandated to pay Chidambaranar port at the level set for 2011 as part of the 30-year contract. This was the first instance of a court-backed freeze on revision in royalty for a port contract after the ports sector was opened to private funds in 1997.

According to the terms of the PSA contract, the royalty per container was `102 in the first year of operations. In the 30th year of operations in 2028, it would reach `5,178 for a container.

PSA Sical currently charges its customers some `2,100 for handling a standard container.

As a result of the Tuticorin district court order, PSA continues to pay a royalty of `1,969 per container (the level set for 2011 in the contract) to Chidambaranar port.

If the stay was not granted, PSA is contractually mandated to pay `2,264 per container as royalty to Chidambaranar port from 15 July 2012 and `2,490 a container from 15 July 2013. The royalty will further rise to `2,615 from 15 July 2014 and so on.

Chidambaranar port had filed an appeal in the Madurai bench of the Madras high court to vacate the stay granted by the district court.

PSA opted for arbitration while the Madurai bench of the Madras high court was hearing the case.

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