Infrastructure Projects Ports and Shipping Sector: What will keep Corporate and Disputes Practices busy in 2024

• Author(s): Ravi Singhania, Shilpa Shah, Vikas Goel
• Date: 06-Jan-2024
• Post in: Infrastructure

The significance of ports in facilitating international trade and fostering economic development cannot be overstated. In India, the focus on developing port infrastructure has been a longstanding priority, resulting in substantial advancements in this domain. With a coastline spanning over 7,500 kilometers, India boasts 13 major ports and approximately 200 minor ports. The management of major ports falls under the purview of the central government, while state governments or private entities oversee the administration of minor ports.

The major ports in India are strategically located in key cities such as Mumbai, Chennai, Kolkata, Visakhapatnam, Kochi, Paradip, Jawaharlal Nehru Port Trust (JNPT), Kandla, Mormugao, New Mangalore, Tuticorin, Ennore, and V.O. Chidambaranar. These ports serve as critical hubs for maritime trade activities, playing a pivotal role in facilitating the movement of goods and contributing to the nation's economic growth.

However, like other sectors, ports have their own set of challenges from regulatory framework governing them to infrastructure issues. Enhancing the efficiency and competitiveness of Indian ports demands a multifaceted strategy. This entails substantial investments in infrastructure, embracing advanced technologies, enhancing connectivity, simplifying land acquisition, refining the policy framework, and promoting public-private partnerships. Tackling these challenges is crucial for fostering the economic development of the country.

Legislative Developments:

On January 14, 2023, the Ministry of Ports, Shipping and Waterways introduced the Major Ports Adjudicatory Board Rules, 2023 (Adjudicatory Rules 2023). These rules have a significant impact on the operations of the Adjudicatory Board of the Major Ports Authority, detailing comprehensively their appointment, powers, and duties.

Business overview:

Ports serve as substantial employment generators in the country, fostering economic growth and job creation. The development of ports leads to the emergence of numerous direct and indirect employment opportunities, spanning roles in port operations, shipping, logistics, and associated industries.

A study conducted by the National Council of Applied Economic Research (NCAER) underscores the significant employment potential within the port sector. According to this research, the port industry has the capability to generate approximately 40 million direct and indirect jobs in India by the year 2025. This highlights the crucial role that ports play not only in facilitating trade and commerce but also in contributing substantially to the nation's workforce and employment landscape.

The ports sector in India faces a myriad of challenges that impact its efficiency, growth, and environmental sustainability:

1. Congestion: Major ports in India experience significant congestion issues, with vessels facing an average turnaround time of 62 hours in the fiscal year 2020-21, well above the global average. The high cargo volume and limited infrastructure contribute to delays and increased logistics costs.
    
2. Infrastructure: Despite considerable investment, many Indian ports lack sufficient capacity and infrastructure. The capacity utilization of major ports was around 65% in 2019, indicating the need for further development. Poor road and rail connectivity exacerbates these challenges.
    
3. Land Acquisition: Land acquisition for port infrastructure development encounters opposition from local communities and environmental activists, leading to project delays and cost overruns. The acquisition process has been a significant challenge, as highlighted by the Parliamentary Standing Committee on Transport, Tourism, and Culture.
    
4. Policy and Regulatory Framework: The complex and fragmented policy and regulatory framework governing the ports sector contributes to delays, confusion, and increased costs. The absence of a unified regulatory body and overlapping jurisdictions among different agencies creates regulatory uncertainty, hindering sector development.
    
5. Technology Adoption: The slow adoption of new technologies and digital solutions in the ports sector affects efficiency and competitiveness. Automation and digitalization, including technologies like automated container handling systems and smart port solutions, are not widespread, impacting global market competitiveness.
    
6. Limited Links to the Hinterland: Inefficient hinterland connectivity via rail, road, highways, coastal shipping, and inland waterways increases transportation costs and impedes freight movement.
    
7. Environmental Impact: Poor adherence to environmental regulations results in spills and leaks during cargo handling, oil spill pollution, and ecological threats from ship cleaning and ballast water discharge. Dredging activities contribute to environmental concerns, affecting local water bodies and fisheries.

Addressing these challenges requires a comprehensive approach, including strategic infrastructure development, streamlined regulatory processes, enhanced technology integration, and sustainable environmental practices.

Challenges in the Legal Landscape:

Articles 53 - 55 of the ICSID Convention outline the rules governing the enforcement of International Investment Arbitration awards. These articles explicitly state that signatory host states are obligated to enforce the rendered award within their territory, treating it akin to a final judgment from a domestic court. India, despite signing numerous Bilateral Investment Treaties (BITs), is not a signatory to the ICSID Convention, thus remaining unaffected by the binding obligations imposed by the convention. This poses a significant hurdle in the enforcement of investment arbitral awards in India.

Furthermore, India's engagement with the ICSID Additional Facility rules, providing arbitration options for situations where one of the parties to a BIT is not an ICSID Convention signatory, introduces complexities. While these rules ensure enforcement under the New York Convention Rules, India's reservation under Article 1(3) of the New York Convention creates uncertainty. The reservation allows India to restrict the convention's applicability to awards arising from disputes deemed "commercial" under Indian law, thereby adding a layer of complexity to the enforcement process.

Concluding Remarks and way forward:

Anticipating a surge in infrastructure investment disputes, there is a pressing need for a robust and specialized regime for arbitral award enforcement in India. The absence of such a framework not only hampers the growth of India's developing economy but also undermines its aspirations to become an International Arbitration Hub. Immediate corrective measures are imperative to address these challenges effectively.

Additionally, managing Change of Scope (COS) in infrastructure contracts is crucial due to external factors affecting projects, such as regulatory changes, design modifications, or unforeseen site conditions. The careful handling of COS in construction works is essential as it significantly impacts project timelines, costs, and quality. Contracts should explicitly define and identify potential variations, and the process for COS notice and approval should be streamlined to avoid project cost escalation and potential disputes.

To enhance the functioning of ports in India, several strategic measures can be implemented:

1. Capacity Expansion: Investing in the expansion of existing ports and the construction of new ones is crucial to meet the growing demand for cargo handling. This necessitates significant investment in infrastructure, including berths, handling equipment, and dredging.
    
2. Automation and Digitalization: Embracing advanced technologies like automation and digitalization can substantially enhance efficiency and competitiveness. Automation reduces reliance on manual labor, boosting productivity, while digitalization improves supply chain visibility and reduces logistics costs.
    
3. Improving Connectivity: Enhancing road and rail connectivity to and from ports is vital for efficient goods movement, minimizing delays, and cutting logistics costs. This requires investments in road and rail networks and the development of multimodal transport solutions.
    
4. Streamlining Land Acquisition: Addressing the challenges related to land acquisition for port development is critical. Streamlining the land acquisition process and addressing concerns from local communities and environmental activists can mitigate delays and cost overruns.
    
5. Policy and Regulatory Framework Improvement: Enhancing the policy and regulatory framework governing the ports sector can reduce regulatory uncertainty and create a more favorable investment climate. This involves creating a unified regulatory body, simplifying approval processes, and minimizing bureaucratic red tape.
    
6. Public-Private Partnerships (PPPs): Encouraging PPPs can leverage private sector expertise and investment. In this model, the private sector takes responsibility for port operations and management, while the government provides necessary infrastructure and regulatory support.

Implementing these measures collectively can contribute to the efficient functioning, growth, and sustainability of the ports sector in India. It requires collaboration between government bodies, private stakeholders, and local communities to address challenges and foster a conducive environment for the development of the sector.