Transport and Communications Bulletin for Asia and the Pacific No.

73, 2003

MARITIME AND AIR TRANSPORT SERVICES:

INDIA’S APPROACH TO PRIVATIZATION
Arpita Mukherjee* and Ruchika Sachdeva**

ABSTRACT

As part of a broader reform programme, the Government of

India embarked upon a privatization programme in the 1990s to
improve the performance of the transport sector and speed up the
investment process in the transport sector. This paper provides
an overview of government policies and initiatives that have been
taken to promote private participation in the maritime and air
transport subsectors and an assessment of the progress made so
far.

There has been some success in attracting private sector

involvement in these two subsectors. This paper has identified
some issues and concerns and makes some suggestions that would
further increase the level of private participation. The paper
draws some conclusions in the light of experience gained from
the privatization initiatives in the maritime and air transport
subsectors.

INTRODUCTION

The linkages between international trade and the transport

network are obvious. An efficient transport system can boost trade and
greater volume of trade can, in turn, create demand for investment in
the transport network. It is now widely acknowledged that efficiency in
the transport sector has major spillover effects on the competitiveness
of both goods and services. Competition and increased efficiency in
maritime transport services, resulting in lower freight rates, contribute

*
Senior Fellow, Indian Council for Research on International Economic Relations
(ICRIER), Core 6A, India Habitat Centre, Lodi Road, New Delhi, India – 110 003;
e-mail: [email protected]
**
Research Assistant, ICRIER; [email protected]

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Transport and Communications Bulletin for Asia and the Pacific No. 73, 2003

directly to a country’s international competitiveness. Similarly, the

development of air transport services is crucial for the sustainable
development of trade and tourism. This sector acts as an economic
catalyst by opening up new market opportunities, moving products and
services with speed and efficiency. The quality of the transport network
has direct implications for the inflow of foreign direct investment (FDI).

In the past, the requirement of large-scale investment, long

gestation periods, uncertain returns, associated externalities together with
social objectives such as consumer protection, welfare and equity have
resulted in government monopoly in transport services. In many
developing countries, the Government owned, operated and financed
the transport sector and success and failure in the provision of such
services was largely a story of government’s performance. This picture
is rapidly changing with globalization and the liberalization of national
economies. Increased commercialization and growth of international
trade has led to considerable pressure on the operating environment of
the existing transport infrastructure, forcing it to adapt new, improved
and more reliable technology. Commercialization has also enhanced
competition among trading nations to increase their share in the world’s
trade. For instance, with increasing size and sophistication of ships,
container ships now make only a few calls in three or four harbours at
each end of the trade while the rest of the traffic is served by small
feeder ships. This has increased the competition among neighbouring
harbours to develop as “hub” ports catering to large container ships.
Governments all over the world are finding it increasingly difficult to
finance the investment required to sustain the growth of transport
infrastructure. On the other hand, globalization has given birth to large
multinational corporations and alliances that have the willingness,
financial strength and technical know-how to operate and manage the
advanced transport network. This has created a unique situation whereby
countries, which were once closed-door, are opening-up their corridors
for privatization and foreign investment.

The Indian aviation and maritime transport sectors have not been
an exception to this trend. Prior to the 1990s, the Government was the
main provider of these services and there were various restrictions on
private participation. During that period, the performance of these
sectors was marked by monopoly-induced inefficiency and low

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productivity. In fact, in both of these transport services, India’s share in

world trade had been steadily declining. In the 1990s, when India
embarked upon an ambitious reform programme, the demand-supply
gap in transport infrastructure became more pronounced. The need of
the hour was to rectify the infrastructural bottlenecks to sustain the
reform programme. It is at this juncture that the Government announced
various reform measures in air and maritime transport services, including
privatization. It was expected that privatization would increase
efficiency through competition, reduce the financial constraints and
speed up the process of adaptation of new technologies.

The following section will provide a broad overview of maritime

and air transport services in India. It will critically analyse the policies
and developments in these sectors since the 1990s. The subsequent
section will suggest various regulatory, fiscal and other reforms which
could facilitate the privatization process and improve the overall
efficiency, productivity and global competitiveness of the sectors.

I. AN OVERVIEW

A. Maritime transport

Maritime transport is by far the main mode of international

transport and over 90 per cent of India’s trade volume (77 per cent in
terms of value) is moved by sea. The Indian peninsula, situated in the
Indian Ocean, is also strategically located between the Atlantic Ocean
in the west and the Pacific Ocean in the east, with a 5,560 km long
coastline, and 12 major1 and 148 operable minor and intermediate ports.
India now has the largest merchant shipping fleet among the developing
countries and ranks seventeenth in the world in shipping tonnage. Indian
maritime services sector not only facilitates the transport of national
and international cargoes but also provides a variety of other services
such as cargo handling services, ship repairing, freight forwarding,
lighthouse facilities and training of maritime personnel.

1
The 12 major ports are: Calcutta (including Haldia), Paradip, Vishakapatnam,
Chennai, Ennore and Tuticorin on the east coast and Cochin, New Mangalore,
Mormugao, Jawaharlal Nehru, Mumbai and Kandla on the west coast.

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The maritime transport system falls under the purview of the

Ministry of Shipping. The shipping industry is governed by the
Merchant Shipping Act, 1958, and the Director General of Shipping is
the regulatory authority for all activities related to shipping. The salient
features of India’s shipping policy are the promotion of national shipping
to increase self-reliance in the carriage of country’s overseas trade and
protection of the interest of shippers. India’s national flagships provide
an essential means of transport for the import of crude oil, petroleum
products, coal and fertilizer, export of iron ore, and exports and imports
of various general (liner) cargoes. National shipping also provides for
a second line of defence in times of war and emergency and contributes
significantly to the foreign exchange earnings.

Even before the 1990s, the shipping industry was fairly

liberalized and there were no major restrictions on the entry of private
shipping companies. Indian shipping, as it exists today, is marked by
the presence of a few large and medium sized national shipping
companies and a host of private players that together carry around
30 per cent of the country’s overseas trade. On the eve of independence
in 1947, India had only 60 vessels with a tonnage of 0.192 million gross
registered tonnage (grt). By December 2001, these figures increased to
555 vessels and 6.91 million grt respectively.2 Nevertheless, this growth
lagged far behind the proposed growth target of 9 million grt for the
Ninth Five-Year Plan (1997–2002) and the national flag carriers are fast
loosing their share of trade to major global players.

From time to time, the Government has announced various

measures to support the growth of the domestic shipping industry.
Government-owned/controlled cargo is channelled by the chartering wing
of the Ministry of Shipping, “Transchart”. As per this policy, the first
right of refusal for carriage of such cargoes is given to Indian vessels.
More recently, in the Union budget 2002-03, the Government offered
various fiscal incentives for the modernization and expansion of fleets.
These include exemption of shipping companies from the minimum
alternative tax if they transfer an amount that is twice the aggregate of
the paid up capital, general reserve and share premium reserve to a
special account meant for ship acquisition.

2
Ministry of Shipping, Annual Report, 2001-02.

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Unlike shipping, prior to the liberalization, the port sector had

largely been a public monopoly. Major ports are under the Ministry of
Shipping and are governed by the Major Port Trusts Act, 1963.
Intermediate/minor ports are administratively under the respective state
governments and are governed by the Indian Ports Act, 1908. Major
ports cater to the bulk of traffic (around 75 per cent in 2001). The
traffic through major ports increased from around 19.4 million tonnes in
1950-51 to 291.1 million tonnes in 2001-02. This growth has not been
uniform. Figure 1 shows that in the first 30 years (1950-51 to 1980-81)
the increase in traffic was only 60 million tonnes. After the liberalization
in the 1990s, there was a sudden spurt in traffic, which grew by
130 million tonnes in the 10-year period, 1990-91 to 2000-01.

Traffic at major ports

(tonnes)

Period
Source: Ministry of Shipping, Government of India.

Figure 1. Traffic at major ports

Increase of traffic between:

1950-51 and 1980-81 (30 years) [5 ports] – 60 million tonnes
1980-81 and 1990-91 (10 years) [10 ports] – 71 million tonnes
1990-91 and 2000-01 (10 years) [11 ports] – 130 million tonnes

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The sudden increase in traffic in the post-liberalization period

brought to light the capacity constraints, inefficiencies and low
productivity of the Indian ports. In addition to privatization, various
steps were taken by the central and state governments to improve port
performance. Some of these steps include:

(a) The power of the Port Trust Boards to sanction projects

was increased to Rs. 500 million in the case of additional/new
investments and to Rs. 1 billion in the case of replacement/renewal of
assets;
(b) An independent Tariff Authority of Major Ports (TAMP)
was set up for fixing and revising the port tariff;
(c) The Major Port Trust Act was amended to enable major
ports to enter into joint ventures with minor ports;
(d) A Maritime State Development Council was constituted
under the Chairmanship of the Union Minister of Shipping to have an
integrated approach to development of major and minor ports;
(e) The major ports were also allowed to enter into joint
ventures with foreign ports and foreign companies;
(f) An Empowered Committee on Environmental Clearance
(ECEC) was constituted in the Ministry of Shipping to provide simplified
and transparent guidelines for environmental clearance.

B. Air transport services

The Indian air transport services were initially developed under

private initiatives. However, in 1953, under the Air Corporation Act,
the operation of scheduled air services was made a public monopoly.
This monopoly lasted for almost 40 years until it was repealed by the
Air Corporations (Transfer of Undertaking and Repeal) Act, 1994. At
present, the air transport sector is fairly liberalized with Air India and
Indian Airlines – both public sector undertakings – providing
international air services together with a host of foreign carriers. Apart
from Indian Airlines some private airlines, such as Jet Airways and
Sahara, operate domestic air services. Infrastructure facilities at airport
terminals are provided by the Airport Authority of India (AAI),

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a statutory body under the Ministry of Civil Aviation. The Ministry of

Civil Aviation formulates national policies and programmes for the
growth, development and regulation of civil aviation. The Directorate
General of Civil Aviation (DGCA) is the principal body under the
Ministry for the regulation of air transport to/from/within India in
accordance with the provisions of the Aircraft Rules, 1937, bilateral and
multilateral agreements with foreign countries and the policy
pronouncement of the Government. Security related issues are handled
by the Bureau of Civil Aviation Security.

Although air cargo accounts for less than 5 per cent of the total
volume of cargo exported, air transport services play a crucial role in
the transport of high-value items and capital goods. Growth of the
tourism industry is directly related to the performance of the aviation
industry since more than 92 per cent of foreign tourists arrive by air.
The country has around 449 airports/airstrips, of which only 61 are in
an operational state. There are 12 international airports but the top 5 of
them (Delhi, Bangalore, Mumbai, Chennai and Kolkata) together handle
over 70 per cent of total passenger traffic and 85 per cent of cargo
traffic. These figures suggest an uneven flow of traffic resulting in
a lack of infrastructure at certain places and, at the same time, a massive
underutilization of the existing network of airport infrastructure.

In 2001, Air India and Indian Airlines had fleet sizes of 27 and
50 aircraft, respectively. The operating performance of both these
airlines is below international standards and they have been showing net
operational losses for successive years. In fact, Air India had to pull
out of many lucrative routes and currently the Middle East is the only
major destination. On the domestic front, with the advent of private
players Indian Airlines is fast losing its market share to private airlines
(see figure 2) and in 2002 its share of domestic traffic was around
40 per cent. On the whole, the Indian civil aviation sector is marked by
lack of funds for modernization and expansion, low productivity,
underutilization of resources, low fleet base, overmanning, a limited
international network and unremunerative yields.

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Transport and Communications Bulletin for Asia and the Pacific No. 73, 2003

Domestic passenger traffic

(in millions of persons)

10

8 7.2

6 5.4
4.7
4
2.4
2

0
1993-94 1999-2000

Year

Passenger traffic of Indian Airlines Passenger traffic of Private Airlines

Source: Air Transport Statistics, various issues, Ministry of Civil Aviation.

Figure 2. Domestic passenger traffic

II. DEVELOPMENTS IN THE 1990s

A. Maritime transport services

1. Shipping

Liberalization and reforms of the 1990s made the environment

of shipping more competitive – both in terms of cargo and resource
mobilization markets. In such an environment, only those industries
that have developed a competitive advantage can thrive. Indian domestic
lines, both private and public, which were so far protected by
government cargo reservation policies and had outdated fleets, found it
extremely difficult to face international competition. As a consequence,
although the volume of overseas trade more than doubled in the 1990s,
the share of domestic lines steadily declined. Major policy changes
which affected the shipping industry were the relaxation of the cabotage
law and cargo reservation policy, whereby foreign flag ships were
allowed to operate on a case-by-case basis. Foreign ships calling at
Indian ports no longer required a license for overseas trade.

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The Government did not remain a mere spectator. To enable the

domestic industry to mobilize resources and facilitate the acquisition of
funds, the Government made several amendments to the Merchant
Shipping Act and simplified the regulatory procedures for raising
resources in order to facilitate the acquisition of new/second hand
vessels at competitive prices. The Government also granted automatic
approval for foreign direct investment up to a limit of 74 per cent and
non-resident Indians (NRIs) were permitted to invest up to 100 per cent
with full repatriation benefits.

In the past, Indian ships had to be repaired at Indian yards, which

were not competitive either in terms of costs or time. This restriction
was removed and shipping companies – both private and public – can
now get their ships repaired in any shipyard without seeking prior
approval of the Government.

However, these measures did little to boost the morale of the

shipping industry and revive the recessionary trends. Shipping is a
capital-intensive industry and in spite of the above-mentioned reforms,
both the private and public players have not been successful in
mobilizing the requisite funds and run a profitable operation. The
shipping industry has blamed the Government for this. Industry
representatives have repeatedly pointed out that unlike many developed
countries, the Indian industry is not subsidized, nor does it have the
status of an infrastructure industry or export industry which would
enable it to enjoy the tax benefits applicable to such industries. The
Indian shipping industry is facing a much higher tax regime than its
international competitors. The industry has to pay a corporate tax based
on profits whereas India’s major trading partners have implemented
a tonnage tax regime.

On the whole, the domestic shipping industry – where the public

and private sectors had coexisted under a protective umbrella prior to
the liberalization – did not gain much in the post-liberalization period.
Shippers, on the other hand, were the main beneficiaries. They had
access to better quality services at lower/competitive rates.

More recently, the Government is considering the disinvestment

of Shipping Corporation of India (SCI), a public sector undertaking,

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which owns 45 per cent of the country’s fleet. The Government, which
owns a 80.12 per cent stake in SCI, initially planned to offer 40 per cent
of its stake to oil public sector units (PSUs) and refineries. But since
the oil companies did not show any interest, the Government has now
decided to sell 51 per cent of its stake in SCI through an open offer.
Out of this 51 per cent, a foreign investor can pick up a maximum of
25 per cent. The Government also proposes to sell 3 per cent of the
equity to employees of SCI, bringing its stake down to 26 per cent.
Three disinvestment routes have been offered to interested bidders – the
bidders can either form a consortium, or a special purpose vehicle (SPV)
or have a group affiliate company pick up the stake. Since the
disinvestment process has yet to be concluded, it is too early to discuss
the Government’s disinvestment policy. Nevertheless, some of the
bidders have raised certain concerns. The bidders fear that since the
Government will continue to have a 26 per cent stake after
disinvestment, the new owner may find it difficult to restructure the
company on issues such as tonnage stripping and reduction in the
workforce. There are also unresolved issues concerning SCI’s stake in
its two joint ventures – Irano Hind Shipping Company Limited and
Greenfield Holding Company (for LNG 3 transport). With Greenfield
already in a cash crunch, bidders want SCI to exit its two joint ventures
before disinvestment. Although the Government has stated that SCI
would continue to partner both ventures, it remains to be seen whether
there is a change in decision to clinch a better deal.

2. Port facilities

With the opening-up of the economy, resulting in a growing

volume of international trade, it became necessary to upgrade and
modernize the port infrastructure. To encourage private participation in
port projects, the Government issued a comprehensive guideline for
private participation in major ports in 1996. The following areas have
been identified for private sector participation:

(a) Leasing out the existing assets of the ports;

3
LNG is liquefied natural gas.

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(b) Construction and operation of container terminals,

multi-purpose cargo berths, and specialized cargo berths, warehousing
and storage facilities, tank farms, container freight stations and setting
up captive power plants, etc.;
(c) Leasing of equipment for cargo handling and leasing of
floating rafts from the private sector;
(d) Pilotage;
(e) Captive facilities for port based industries.

The policy recommended that private participation in port

projects should be through a competitive bidding and on a build-operate-
transfer (BOT) basis. The policy also stated that the concerned Port
Trust would not give any guarantee for financial returns or expected
tariff to the private sector. In parallel, the port sector was opened to
foreign investment. Foreign equity participation was allowed up to
74 per cent through an automatic route in construction activities in ports
and harbours and up to 51 per cent in support services such as the
operation and maintenance of piers.

Unexpectedly, this policy received a lukewarm response. In the

next few years, the Government juggled with a series of policies and
amendments to the existing ports and shipping acts. The next major
policy initiative was the setting up of TAMP – the independent tariff
regulatory of major ports. To lure foreign investment, the Government
further liberalized the foreign investment policy, allowing 100 per cent
FDI in construction of ports and harbours through the automatic route.
Foreign investors were also allowed to enter into joint ventures to
develop port facilities. The Ninth Five-Year Plan, which began in 1997,
placed emphasis on private participation in both major and
minor/intermediate ports. Additionally, a series of fiscal incentives were
extended to lenders and developers of port projects. For instance,
a 10-year tax holiday was announced for the development of ports. This
can be used in the first 20 years of operation. Import duties on
equipment have been significantly reduced. The Government also
granted a tax concession of 40 per cent to financial institutions on
income from financing port projects and earnings from funds invested
in infrastructure projects are also exempted from income tax.

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Subscription to equity shares and debentures issued by infrastructure

companies are now eligible for a 20 per cent income tax deduction up
to a limit of Rs. 70,000 a year.

The Government’s effort to attract private investment has not all

been in vain. Many new port development projects have been sanctioned
in the 1990s. A new major port, Ennore, near Madras was sanctioned in
April 1993. This project was financed by the Asian Development Bank,
which sanctioned US$ 150.15 million for the project. The Chennai Port
Trust has developed the Ennore Port under a “landlord” concept, i.e.,
the common infrastructure is developed by the port, while the berths
and equipment therein are financed by private developers on a BOT
basis. The Ennore port started functioning from January 2001. In 1997,
P&O Ports Australia was awarded the contract for setting up a new
container terminal in Jawaharlal Nehru Port Trust (JNPT). In recent
years, the same investor has won the twin contract to develop container
terminals at Chennai and Kochi on a BOT basis. In 1998, another
global player, the Port of Singapore Authority, was given the contract
for developing and maintaining the container handling facilities at
Tuticorin. The domestic investors are not far behind. Gammon India
has tied up with Protia Management Services of the United Kingdom of
Great Britain and Northern Ireland to form Vizag Sea Ports Limited,
which will construct two new multi-purpose berths at the port.

In addition to the steps taken by the central government,

governments of the coastal states have also taken initiatives to develop
the minor ports within their jurisdiction. All maritime states have issued
policy statements, which highlight the various incentives offered by the
respective state governments for investment in port projects. Various
development projects through private participation have been sanctioned
in the States of Gujarat, Maharashtra and Andhra Pradesh. The Pipavav
and Mundra ports in Gujarat have been developed as joint ventures
between the Gujarat Maritime Board (which has a 26 per cent share),
private sector (25 per cent) and the public (49 per cent). P&O Ports
Australia has been awarded the contract for operating container terminals
in Vadhawan (Maharastra).

An analysis of private sector participation in port projects reveals

a clear trend – private investors are more interested in the operation of

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container terminals and in the development of minor/intermediate ports.

This is mainly owing to the fact that most private and foreign investors
prefer to invest in projects with short gestation periods and strong
revenue streams.

It is often argued that in comparison to other Asian countries

such as China, India has been far less successful in its privatization
drive and the whole process has been slow and hesitant. For instance, it
has taken three years to finalize procedures and invite tenders for
privatization of JNPT container terminal. Case studies of some of the
BOT port projects in India 4 show that private investors have not
responded as affirmatively as expected owing to the tendency of the
Port Trusts to demand an unreasonable share of anticipated earnings,
especially during the early stages of operations. Port projects have long
gestation periods and require substantial investments. The revenue
realization is delayed until the completion of the projects and may not
be adequate to cover all costs, particularly in the initial years of
operation. There are several flaws in the BOT concession agreements.
The main drawback is that the investor’s investment is not backed by
a legal statue, although it is a common practice in South-East Asian
countries and the United States of America. Furthermore, the agreement
does not take into account the geo-technical and socio-commercial
features of the individual ports so that there could be some concessionary
adjustments and preferential incentives for development of ports in
backward areas. The agreements also state that assets financed on a
BOT basis will revert free of cost to the Port Authority at the end of the
concession period. This is a possible deterrent to continuous upgrading
and modernization of facilities during the term of the concession.

Private investors in major ports do not have the autonomy to fix

their own tariff subject to market conditions, since tariffs in these ports
are regulated by TAMP. This acts as a constraint on the operational
efficiency of the projects. Foreign investment in cargo related projects
is scarce since TAMP does not allow cost recovery through forex-linked
tariffs. 5 Also, private investors at major ports cannot implement their
4
Bennett and Eswaran (1996).
5
However, container handling charges can be levied in foreign currency and are
treated as vessel-related charges, resulting in the keen interest shown by foreign
companies in containerization projects in the country.

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own employment policies as the labour hired by the privatized firms in

privatized berths are subject to labour laws as defined by the Ministry
of Labour. The complexity of rules, lack of a clearly defined action
plan and the long and unpredictable approval process have often made
the projects commercially non-viable.

A major constraint in the process of privatization of minor ports

has been the lack of adequate infrastructure facilities linking the ports
and the hinterland. In many minor ports, the investors themselves have
taken initiatives to set up the rail and road connectivity. For instance,
in January 2000 Pipavav Port formed a joint venture with Indian
Railways to set up a rail connection to the main network.

Despite the various fiscal incentives offered by the Government,

the financing of port projects is still clouded with a lot of doubts. The
debt-equity ratio of 60:40 for financing port projects is more conservative
than that of other sectors. This is because there is no traffic guarantee.
As a result, banks and financial institutions are somewhat wary to
finance this sector.

If one looks at the impact of liberalization and privatization on

port productivity there is no doubt that the productivity of Indian ports
has increased manyfold since liberalization. The average ship turn
around (ASTA) time has declined from 11.9 days in 1984-85 to
4.17 days in 1999-2000 and the average ship berth output improved
from 2,314 tonnes per day to about 6,321 tonnes per day during the
same period. However, this improvement in performance does not
compare favourably with that of other efficient ports in the region. For
instance, the ASTA time at the ports of Singapore, Hong Kong, China,
and Colombo is only a few hours. The total container cargo handled by
all ports in India is much lower than that handled at a single port of
Singapore or Hong Kong, China. Hence, much needs to be done in
terms of improvement in efficiency and productivity. The proposed
Tenth Five-Year Plan (2002-2007) gives high priority to modernization
and the development of port infrastructure through private investment.
The Government would largely act as a facilitator, removing the existing
restrictions and enabling private players to make profitable investments.
The Union budget (2002-03) has worked towards this end. On the one
hand, there is a 66 per cent drop in public funding for the port sector,

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on the other, the budget proposes a reduction in custom duty on

equipment used by port and port services. This will enable a reduction
in the capital cost for port developer and service providers. The
Government has also implemented various schemes to enable the
development of special economic zones around the ports, which can
also make port investments more attractive.

B. Air transport services

1. Airlines

Prior to the 1990s, it was felt that monopoly in the aviation

sector was necessary to reap the benefits of economies of scale, ensure
safety and security and enable the country to achieve social objectives
of equity, welfare and consumer protection. During that period, the
Government had a monopoly in the building of airports, from conception
to delivery, with business assured for national carriers that were also
monopoly users.

With liberalization and the increase in international travel, the

need to enhance the quality of service and improve capacity became
obvious. It became increasingly difficult for the government to finance
the development of airport facilities and increase airline capacity, hence,
there was a move towards privatization and foreign investment.

The scope for privatization in the Indian aviation industry is

limited to the construction, operation and maintenance of airports and
operation of air services. Since air traffic control is considered to be
closer to a public good and regulatory in nature, India, like most other
countries, has not opened up this sector for privatization. There is very
limited scope for development of the aircraft manufacturing industry,
except for the manufacturing of certain low-end aircraft.

The first step towards liberalization was as early as 1986 when

private airlines were allowed to operate charter and non-scheduled
services 6 to all authorized airports under the Air Taxi Scheme and to
decide their fares and flight schedules. This Scheme was implemented
to boost the tourism industry.
6
That is, they could not publish time schedules or issue tickets to public.

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A major move towards liberalization was in the early 1990s when

India implemented an open sky policy 7 for cargo which allowed
international airlines to operate cargo flights without restrictions and to
charge rate without reference to DGCA. Under this policy, any foreign
or domestic airline or association of exporters or private operators can
bring freighters to the country for lifting cargo from any Custom airport.
The purpose of this policy was to facilitate the growth of international
trade, exports in particular. Following this, several private international
airlines began to operate air cargo flights. The immediate effects of this
policy were an improvement in the availability of timely cargo services
at competitive rates, decline in cargo rates and increase in volumes
handled by as much as 15-20 per cent per year. However, there still
remain restrictions on cabotage – international airlines are not allowed
to carry domestic cargo on their flights within the country.

The next major step was the termination of the state monopoly
over scheduled air transport services with the enactment of the Air
Corporation (Transfer of Undertaking and Repeal) Act, 1994. The main
reasons for the deregulation was the decline in profitability of Air India
and Indian Airlines owing to organizational and managerial inefficiencies
and that the capacity of the national carriers was not enough to meet
growing passenger demand. With the enactment of the 1994 Act, private
operators were allowed to operate both scheduled and non-scheduled
services in the domestic sector and there were no major restrictions on
aircraft size and type. However, in order to ensure safety, security and
orderly growth of air transport services and keeping in view the
infrastructural constraints at a number of airports, the Government
permitted the addition to capacity based on traffic projections. To
support the growth of the airline industry the Government in 1994-95
permitted direct import of aviation turbine fuel (ATF) under the special
import license scheme. In 1997-98, the privatization policy was further
liberalized and foreign equity participation of up to 40 per cent (100 per
cent in case of non-resident Indians) was allowed in the domestic airline
sector. Foreign airlines are, however, not allowed to pick up the equity,
directly or indirectly.

7
An open sky policy, even in other countries, does not imply that the market is
entirely competitive. Landing rights are constrained by the notion of bilaterals, which
is a major factor restricting competition from a third country’s carrier.

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The private sector initially responded with lot of enthusiasm and

euphoria. In fact, by April 1998 there were 7 scheduled private operators
which operated alongside of Indian Airlines and 27 non-scheduled
operators. Subsequently, many of them had to wind up their operations
and only two private airlines – Jet Airways and Sahara are now operating
in India. The Government cannot be blamed entirely for this failure. A
large part of the failure was owing to internal reasons such as lack of
adequate financial resources, lack of knowledge about the business,
frequent shifting of routes and operation and management inefficiencies.

An important reason for the failure of private airlines is the high

price of ATF. The price of ATF in India is almost 2.5 times higher than
the world price. Many state governments have imposed sales tax on
ATF, ranging from 20-35 per cent. This itself has imposed an additional
burden of 10 billion rupees on the aviation industry and has severely
affected the profitability of operators.

Another policy which has adversely affected the operation of

private airlines is the categorization of air routes. The Indian Civil
Aviation policy has classified the air routes in three categories, as
mentioned below, taking into account the need for air transport services
in different regions.

Category I : Consists of routes to and from:

• Mumbai to Bangalore, Calcutta, Delhi,

Hyderabad, Chennai and Trivandrum;
• Calcutta to Chennai and Bangalore;
• Delhi to Bangalore, Hyderabad and Chennai.

Category II : Connect stations in the north-eastern regions,

Jammu and Kashmir, Andaman Nicobar Islands,
and Lakshwadeep.

Category III : Consists of routes other than those in category I

and II.

The policy states that 50 per cent of the kilometrage done by an

airline on the category I routes has to be compulsorily done on the
category III routes and 10 per cent on the category II routes. Since

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most private operators have large aircraft which are suitable for category
I routes only, it became economically unviable to operate them in
category II and III routes. It has been estimated that this has imposed
a burden of around 800 million rupees for the north-eastern sector alone.
Many private operators lacked the scale required to maintain separate
aircraft for flying to different routes. Most countries globally meet the
social objective of route dispersal through direct cash subsidization
whereas in India the industry is expected to bear the burden through
cross-subsidization.

Private domestic operators are not allowed to operate on

international routes even in cases where no national carrier is flying to
certain countries such as Spain and Australia. Other factors resulting in
the failure of private participation are the lack of transparent and
consistent government policy, high rates of airport charges, high inland
air travel tax, lack of adequate airport infrastructure and limited watch
hour problem at minor airports.

In the year 2000, the Government announced the disinvestment

of Indian Airlines. It has been proposed that 51 per cent of the equity
of Indian Airlines will be disinvested, out of which 26 per cent will be
given to a group/company/individual that has been referred to as
a strategic partner. The remaining 25 per cent will be offered to
employees, financial institutions and the public. In line with domestic
air transport policy, foreign airlines will not be permitted to pick up the
stake. The Government also proposed the disinvestment of 60 per cent
of its stake in Air India, of which 40 per cent equity will be given to
a strategic partner (which includes 26 per cent of the total equity to
a foreign airline), 10 per cent to employees and the balance will be
offered to employees, financial institutions and the public.

Although the Government has been considering the disinvestment

of national carriers for quite some time, so far nothing has emerged.
This is primarily because of shifts in government policies and slow
decision-making. In the initial stages, many foreign airlines such as
Singapore Airlines, and domestic companies such as Tata, showed their
interests in this sector – but this has slowly died down owing to delays
in decision-making. In the current year, the Government has further

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deferred the disinvestment process in the anticipation that the airlines

will fetch a better price once the global economy recovers.

2. Airport facilities

In 1997, the Ministry of Civil Aviation brought out a policy on

airport infrastructure. This policy emphasized the need for private
investment to increase airport capacity and achieve a higher level of
customer satisfaction. In order to facilitate private participation, the
policy proposed the establishment of an airport restructuring committee
in the Ministry of Civil Aviation. This committee would identify the
airports where private participation is required and conduct the feasibility
study for the benefit of the private players. An independent statutory
body, the Airport Approval Commission, would examine the private
sector proposals and submit them to the Government. The policy also
laid down various fiscal incentives for airport development.

In the initial stage, the Government encouraged private

participation in the construction of new airports on a BOT basis similar
to that envisioned for seaports. Foreign airport authorities were also
allowed to invest in such projects and foreign equity participation was
allowed up to 74 per cent (100 per cent with special permission). Some
private sector aided projects have already been completed. For instance,
the Cochin airport was commissioned on a BOT basis. Projects for
development of new airports with private participation are also coming
up at Bangalore, Hyderabad, Mumbai and Goa.

In the Union budget 2002-03, the Government announced its

decision to upgrade the international airports at Delhi, Mumbai, Chennai
and Kolkata by inducting private sector management and investment
through long-term leases. This lease process is expected to be completed
in the current financial year.

Overall, the government’s airport privatization policy is marked

by indecisiveness, inconsistency and lack of transparency. Previously,
the Government considered the corporatization of the Airport Authority
of India and privatization on a BOT basis, but is now moving towards
long-term leases.

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C. Some general observations on various

government initiatives

To sum up, although the policy initiatives in the maritime and

air transport sector do reflect the Government’s acceptance of the need
for privatization and foreign investment, they fall short in many respects
and there are loopholes in major policies. They are characterized by
lack of clarity and openness, discretion, overt and covert forms of
discriminatory treatment towards some categories of investors and lack
of strategic planning. For example, although the civil aviation policy
states that private participation will increase investment and enable the
sector to improve the quality of services, efficiency and global
competitiveness, the policy does not clearly spell out the terms and
conditions and the means by which such encouragement will be provided
to the private investors. The port development policy lacks foresight
and planning. While most other developing countries (for example,
Sri Lanka) have used private/foreign investments to develop one or two
ports as hub port/s, in India the investment is scattered across several
major and minor ports. As a consequence, none of the ports have
emerged as a hub port and India is losing valuable foreign exchange in
transshipment to other Asian ports, such as Singapore and Colombo.

In the air transport sector, although the Government has proposed

the disinvestment of Indian Airlines, a foreign airline is not allowed to
pick up the stake. Who, other than a foreign airline, would otherwise
be interested to invest in a loss-making domestic airline? How can an
airline benefit from liberalization if it cannot leverage the network
resources or benefit from the technical and managerial expertise of
a foreign airline?

Similarly, in the case of ports, without any power to reduce

manning scales, how can a private player operate profitably? Hence, it
is not surprising that there has been limited progress towards
privatization in these sectors.

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III. WHAT NEEDS TO BE DONE?

A. Maritime transport

Private sector participation in maritime and air transport services

would depend on the ability of the Government to foster and nurture an
investment-friendly climate. The latter has not happened. There is
urgent need to rectify the existing loopholes in the policies and
implement an appropriate regulatory structure to ensure transparency,
fairness and a level playing field without jeopardizing consumer and
national interests. For instance, in the case of ports, the license
agreement should address clearly the various risks involved in the
pre-construction, construction and operational phases. In civil aviation,
various issues, such as future traffic allocations, terms of transfer of
ownership of titles to make land available and strengthening of related
infrastructure need to be solved before the privatization of airports takes
place. The civil aviation policy, which has been under consideration for
over five years, needs to be finalized and released with immediate effect
since the lack of a transparent document discourages private investment
because of the increased risk perception owing to likely changes in
policies.

In both these transport sectors, the Government should act as a

facilitator and do away with its control over operation and management.
Ports and airports should be corporatized, giving the management more
freedom in decision-making and making them accountable for their
performance. There is need for a strong, independent, transparent and
reliable regulatory authority, which would balance the interests of the
public and the private sector, domestic and foreign businesses, buyers
and sellers.

There is urgent need to develop the intermodal transport system

and allied logistic services, such as warehouses and container freight
stations. Unlike most countries of the world, many major ports in India
do not have rail connectivity. The slow pace of development of the
inland transport chain has delayed the process of private investment.
Gujarat is one classic example which has tremendous potential for
private investment in ports but lacks the basic infrastructure. A study
should be undertaken to consider how the ports and the supply chain as

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a whole could benefit through efficiency gains from improved logistics

facilities and rail connectivity of ports with the hinterland.

Tax structures should be revised to enable the industry to achieve

a competitive edge. In shipping, the existing corporate tax should be
replaced by a tonnage tax, which would, in turn, strengthen the domestic
shipping industry. In aviation, a reduction in tax on ATF and duties on
domestic air travel would enable the industry to become more
competitive.

In order to ship Indian container cargoes directly through Indian

ports, the ports will require large container terminals with adequate quay
cranes, gantry cranes, tractor-trailer systems, trained and efficient
operators, paved areas, good rail/road link, container trains, ICD
facilities, automation and well-knitted cooperation of various agencies
involved in the exercise. Such developments require massive
investments and substantial planning, hence, it may not be possible to
develop all the ports simultaneously. Ideally, India needs to develop
two major ports initially: one on the east coast (for example, Chennai)
and another on the west coast (for example, JNPT), into transshipment
hubs so that most Indian cargoes can be shipped from and received at
these ports. The hub port in the west coast will cater to westbound
cargo covering the Atlantic region and that in the east coast will cover
the Pacific region. These two hubs can then be interlinked through
a “land bridge” and this will make the whole operation cost effective
and reduce delays (since the shipping lines can avoid going round the
Indian peninsula). However, a study will be required to examine this
suggestion further and to work out the details of hub-port operations
and of connecting them by a land bridge.

Privatization of Indian ports has been slow and hesitant. One of

the main reasons for this is that India does not have any sectoral master
plan outlining the short, medium and long-term development
opportunities in the port sector. While the Ministry of Shipping is
responsible for projects being taken up by the major ports, the respective
state governments and their agencies are responsible for minor port
projects. The projects for development of the minor ports can be
vulnerable to significant traffic risks since these ports are in close
proximity to each other and also to some major ports. This has slowed

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down private investment in projects initiated by the eight coastal states.

Moreover, there is no common development strategy and different states
have implemented their own policies. For example, in some ports of
Gujarat and Maharashtra, the state governments have equity participation
while in other states such as Kerala, the Government provides the basic
facilities such as break waters, capital dredging, navigational aids and
communication equipment. The absence of a common BOT policy
creates confusion among private players investing in this sector.
Moreover, most Indian ports compete with each other for private
investment rather than with other Asian ports.

To facilitate speedier investment in the port sector and to catalyse

investment intentions into actual investment, there should be a sectoral
master plan outlining the short, medium and long-term development
opportunities in the port sector based on national economic trends and
a tentative forecast of traffic patterns. The master plan should ensure
that the projects undertaken by the central and state governments do not
compete with each other, leading to subsequent non-viability.

The role of TAMP needs to be carefully scrutinized. Private

operators should be given the flexibility to charge tariffs as determined
by market forces. Even if there is a regulator, tariff regulation should
be based on ceiling rates, leaving to the operators the freedom to apply
or negotiate tariffs below the maximum allowed limit, rather than on
fixed rates allowing for no departure. However, studies are suggested
to work out the details of this type of tariff regulation and the role of
TAMP in the future.

The present policy of taking over the port labour along with the
existing assets is a major deterrent in attracting private investment in
major ports. There is urgent need to formulate a clear strategy and
action plan to tackle the labour issues.

B. Air transport

In air transport services, scheduled operators do not have route

flexibility. The policy of route categorization is problematic as airlines
are forced to operate on less lucrative and unviable routes. In fact, the
market should be allowed to dictate air service needs, with adequate

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freedom to the operators to choose the appropriate aircraft to match the

payload and sector distance requirements. Airlines willing to provide
services on unviable routes should be allowed to bid on a minimum
subsidy basis.

The Government should seriously look into its disinvestment

policies. The policy of restricting the equity participation of foreign
airlines prevents the domestic airline industry from benefiting through
imports of technical know-how, expertise and management practices,
which are available globally. The ceiling of 26 per cent on foreign
ownership is also not viable since none of the foreign investors is
showing an interest in the sector unless the foreign equity participation
is raised to 49 per cent.

Last, but not least, one should remember that increased

competition and removal of market distortions will enable the country
to gain from liberalization and reforms rather than a mere change in
hands from public to private.

SUMMARY AND CONCLUSIONS

Maritime and air transport services are important for their

intermediate role in the economy and their linkages with many other
sectors. Prior to the 1990s, the Government was the main provider of
these services and there were various restrictions on private participation.
During that period, the performance of these sectors was marked by
monopoly-induced inefficiency, low productivity and lack of global
competitiveness. With the growth of the Indian economy, the transport
sector was finding it extremely difficult to cater to growing domestic
demands. To enable air and maritime transport sectors to operate
efficiently and regain their competitive strength, the Government
embarked upon an ambitious privatization plan in the 1990s, which was
a part of the broader reform programme initiated by the Government. It
was expected that induction of private investment and management
practices would increase efficiency, reduce the financial constraints and
speed up the process of adaptation of new technologies.

However, in the absence of a conducive environment for private

participation and given the coherent, indecisive and halting nature of

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most initiatives, there has been limited progress towards privatization

and attracting investments in new infrastructure and consequently,
improvement in the productivity, efficiency and competitiveness of these
services. The real gains of liberalization can only be achieved through
removal of market distortions and enhancement of competition and not
through a mere change of ownership from the public to private sector.
In line with these axioms, specific measures have been suggested in
section III for the improvement of the current situation in the ports and
maritime subsectors in India. The Government may consider the
implementation of a transparent regulatory structure, which could reduce
uncertainties, ensure a level playing field and improve the quality of
services taking into account the interest of consumers. Instead of direct
intervention, the Government should act as a facilitator, leaving it to the
private sector to take operational and management decisions. This
will enable the country to achieve the desired objectives of growth,
capacity-enhancement and efficiency in both the public and private
sectors.

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Selected readings

Bennett, M.F., and Eswaran, P., 1996. Development of Ports in India

through Build, Operate and Transfer. Frederick R. Harris India Private
Limited, New Delhi.

Chanda, R., 2002. Globalization of Services- India’s Opportunities and

Constraints. Oxford University Press.

Ghosh, B., and De, P., August 2001. “Indian Ports and Globalisation:
Grounding Economics in Geography”, Economic and Political Weekly,
vol. XXXVI, No. 34, pp. 3271-3283.

India Infrastructure Report, 2001. Oxford University Press.

India Infrastructure Report, 2002. Governance Issues for

Commercialization. Oxford University Press.

Kaw, M.K., June 1998. “Role of Private Sector in Civil Aviation: The
Indian Experience”, Asian Transport Journal, pp. 93-100.

Ministry of Civil Aviation, 1997. Policy on Airport Infrastructure,

Government of India.

Ministry of Civil Aviation, 2000. Civil Aviation Policy (Draft),

April 2000, Government of India.

Ministry of Civil Aviation, Air Transport Statistics, Various issues,

Government of India.

Ministry of Civil Aviation, Annual Report, Various issues, Government

of India.

Ministry of Civil Aviation, Domestic Air Transport Policy, Government

of India.

Ministry of Shipping, 2001. Report of Working Group for Port Sector

for the Tenth Five Year Plan (2002-2007), October 2001, Government
of India.

Ministry of Shipping, Annual Report, Various issues, Government of

India.

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Ministry of Shipping 2001. Proposals for Tenth Five Year Plan

(2002-2007) and Annual Plan 2002-2003 for Port Sector, Government
of India.

Mukherjee, A., 2001. India’s Trade in Maritime Transport Services

under the GATS Framework, ICRIER Working Paper No. 76. ICRIER,
New Delhi, India.

Mukherjee, A., et. al., 2002. Country Report, India. Paper presented at
the Regional Seminar on Liberalization of Maritime Transport Services
under WTO GATS (Maritime Services), 11-13 February 2002, Bangkok.

World Bank and Public-Private Infrastructure Advisory Facility, 2000.

Country Framework Report for Private Participation in Infrastructure,
India, pp. 41-51.

World Bank, 1994. World Development Report: Infrastructure for

Development, Oxford University Press.

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