New Delhi: Ruias-promoted Essar Ports on Monday said the government should scrap the price discovery mechanism proposed in a draft captive port policy, which seeks to allow industries to set up "captive ports" on the land and waterfront owned by all major ports of the country.

The company feels that the said mechanism will make setting up of infrastructure at the major ports extremely expensive, as the discovered price for running the captive berths will be over and above the tariff paid by the customers.

"Tariff is already fixed by the port trusts. On top of that, it has been proposed to pay 15 per cent returns on investments (to the port trusts) in the draft policy, which is unreasonable, as this will make creation of infrastructure very expensive," Essar Ports Managing Director Rajiv Agarwal said.

"This clause needs to be scrapped to promote investments in the sector," he added.

The draft captive port policy, released in June, says that port-based industrial units (which are large port users) will be allotted land and waterfront areas on a nomination basis for setting up dedicated infrastructure for their own use at major ports of the country.

It adds that interested parties will have to indicate the "Minimum Guaranteed Throughput" (MGT) of the port infrastructure, which should be at least 50 per cent of the capacity of the project within two years of commercial operation.

However, it also says, if more than one party is interested, the project will be awarded to the bidder offering the maximum net present value (NPV), which will be based on certain criteria.

"There is no nomination in it, as there will be bidding if more than one participant is there," Agarwal said, adding, "On top of that, they are saying price discovery (maximum NPV) is required. Currently, we do not have access to cheaper funds and rates are on the rise."

"Amid this, we are going to give 15 per cent returns (on investment) to the ports. So what is left for the operator?", the Essar Ports MD quipped.

The formula to calculate NPV says that the minimum guaranteed throughput (MGT) of each year will be multiplied by the quoted revenue for the corresponding year and then it would get discounted at a rate equal to 10-year government securities plus 5 per cent.

It further said that the quoted revenue shall not be less than 50 per cent of wharfage and handling charges, according to the schedule of rates of the port. Besides this, the draft policy says that in case of only one interested party, the project will be awarded at a discovered price amounting to 50 per cent of wharfage plus handling charges, or a 15 per cent return on investment (as per the TAMP order), or a negotiated rate between the port and party, whichever is highest.

Agarwal further said the government should allow the use of captive facilities by other parties, as this will turn out to be a major revenue generator for the concerned port as well.

Currently, the draft policy has proposed that the entire project cost will be borne by the winning company, while the captive user will be allowed to handle only the specified cargo. The major port will have the right to assign the use of the port to others if the capacity is not fully used by the company according to the terms and conditions agreed by the developer of the port.

All the proposals received will be evaluated by an empowered committee comprising the Shipping Secretary and representatives from the Planning Commission, Department of Economic Affairs and port trusts, said the draft policy.

"The issue is of finances, as interest rates are continuously rising. So there should be a mechanism for refinancing it with cheaper foreign loans, as it will provide a boost to the infrastructure sector," the Essar Ports MD said.

The company currently has a total capacity of 88 million tonnes per annum (MTPA) and it plans to almost double it to 158 MTPA by 2013-14. The company said just last week that it would commission 16 MTPA of iron ore handling capacity at Paradip by February-end.