The Transnet National Ports Authority’s (TNPA’s) recently introduced Excessive Tariff Increase Margin Credit (ETIMC) was critical in enabling the ports and shipping industry to absorb potentially debilitating and sudden price increases, Ports Regulator of South Africa CEO Riad Khan said on Tuesday.

The ETIMC, which was currently being introduced by the Ports Regulator of South Africa with an opening balance of R900-million, was designed to prevent any excessive future yearly tariff increase, as informed by TNPA’s investment drive.

“Since access to capital is essential to investment and the effective provision of port services, the authority considers it prudent to retain an ETIMC to offset against future large, justified tariff increases resulting from the capital expenditure programmes,” Khan said during a workshop to discuss the TNPA’s proposed tariff methodology for 2014/15 onwards with stakeholders.

In the event that the tariff determination warranted an excessive yearly tariff adjustment that could negatively impact on the industry, the ETIMC could be used as a mechanism to phase in or delay tariff spikes over a longer period of time to allow industry to adjust to significant increases at a more sustainable rate.

“We feel we have been responsible and pragmatic by building a savings fund. There are some industries that would not be able to absorb price increases – we don’t want to be one of them,” Khan noted.

Any debit or credit balance remaining in the ETIMC would attract a return aligned to the weighted average cost of capital determined.

“It is not a question of dumping and leaving money, nor is it a contingent liability. This is in anticipation of a definite future impairment of the authority’s revenue,” he asserted.

The release of the ETIMC, or a portion thereof, would be subject to agreement between the regulator and authority as part of the multiyear tariff application.

Meanwhile, TNPA CFO Mohammed Abdul asserted that the proposed revenue requirement tariff methodology for 2014/15 onwards was the most appropriate for the organisation.

He told stakeholders that this methodology would achieve a return sufficient to recover the opportunity cost of the capital employed in the production of the regulated services and provide efficient price signals to market participants.

The tariff was required to adhere to the Ports Act, which stated that the tariff should enable the ports authority to recover any investment, to recover the running costs of the organisation and to align any profit with risk.

Abdul further noted that the revenue requirement tariff methodology would provide the authority with the incentive for efficient investment in relevant infrastructure and services and would promote regulatory independence and certainty through a full disclosure requirement.

The methodology determined the tariff by multiplying the authority’s expected regulatory asset base for the period by the authority’s yearly capital investment.

Operational costs, yearly depreciation and tax expenditure would then be added to this amount, with allowances made for clawback, excessive tariff increase margin credit and financing requirements.

The ports authority asserted that the proposed methodology was informed by its strategic mandate to provide infrastructure and capacity in anticipation of demand, to provide efficiencies and to facilitate an integrated system for trade.

“The methodology was formulated to answer the question: how much revenue should the TNPA be allowed to earn and what port costs should the users of the system bear?” said Abdul, adding that the tariff methodology would be used to protect that revenue.

Revenue would be used to drive the TNPA’s vision for South African ports – the creation of a system of port centres linked through a logistics network, with each jointly and individually self-sustainable.

Tuesday’s workshop enabled stakeholders to submit alternative or opposing tariff methodologies and pricing structures, as well as allowed them to respond to the TNPA’s proposal.

Abdul said the consultations were a milestone in encouraging dialogue around tariffs between the ports authority and its port users.

Public hearings around the proposed pricing structures had already been held in Cape Town, Saldanha Bay and Mossel Bay, with additional hearings scheduled for East London, Port Elizabeth, Ngqura, Durban and Richards Bay later this week.