PSA International’s growth aspirations in India have received a jolt after the country’s southern Tuticorin Port authority, also known as V.O. Chidambaranar (VOC), last week issued a notice of termination to PSA-Sical Terminals over long unsettled royalty obligations.

“Till date, PSA Sical has not paid the royalty dues nor approached this port for payment of the royalty dues. In terms of Article 13.4.5 of the License Agreement, the 90 days period of termination notice expired on 19 April 2022. As the default continues, this port hereby issues a termination order. Necessary action shall be taken by the port to take possession of the licensed premises and recovery of the dues payable by PSA Sical as per the license agreement,” VOC stated.

The issue has its roots in the complexities around government tariff guidelines for projects awarded under the build-operate-transfer (BOT) development model in the initial stages of port privatisation in the country. PSA Sical began operations in 1998, designed with an annual capacity of 450,000 TEU.

BOT contracts at major Indian landlord ports are designed around a minimum throughput guarantee model, which typically obligates concessionaires to meet royalty payments to landlord ports on committed throughput levels. As such, PSA Tuticorin is obligated to handle 300,000 TEU annually as a minimum volume commitment and must pay container royalties, which incur a 20% increase every year on this figure regardless of the actual boxes handled. For PSA Tuticorin, the royalty levels have been set to increase from Rs. 102 (US$1.3) to Rs.5,178 (US$67) per TEU over 30 years.

Under the cost-plus methodology, the surplus revenue so generated is factored in when the port regulator Tariff Authority for Major Ports (TAMP) sets up tariffs every three years, thus often resulting in drastic rate reductions for concessionaires.

PSA had used every legal forum to challenge the royalty terms, but failed to secure a reprieve in its favour. India’s Supreme Court also dismissed a petition filed by PSA — a last-ditch effort — by which the company had sought to modify its terminal concession at Tuticorin from a royalty model to a revenue-sharing arrangement with the landlord port.

According to industry sources, PSA’s royalty accruals up to 2019 were pegged at over Rs. 1,000 crore (US$128 million), and any contract termination can also prove to be a reason for disqualification while bidding on other prospective projects in the country.

Amid those tariff complications, PSA Sical has suffered steep volume drops, handling just 183,179 TEU in the fiscal year 2021-22, down from 213,337 TEU a year earlier. In contrast, its new intra-port competitor Dakshin Bharat Gateway Terminal (DBGT), which opened in 2014, has consolidated its market share at a rapid pace, with 2021-22 volume reaching 598,279 TEU, up from 548,942 the previous year. PSA Sical was once touted as the productivity leader among terminals at major ports in India.

The termination blow comes as PSA is in the midst of Phase II development of its high-stakes terminal investment (BMCT) at Nhava Sheva/JNPA.

Source: Container News