Logistics

Adani’s Colombo entry turns India’s transshipment ambitions on its head

P Manoj Mumbai | Updated on March 17, 2021

India’s biggest private port operator building West Container Terminal in Colombo flies in the face of public posturing by government officials on promoting container transshipment hubs within India

India’s ambition to set up container transshipment hubs within the country to send and receive cargo containers , instead of routing them via Colombo port, has been turned on its head with the Adani Group winning a deal to build a terminal in the island nation’s main port.

An incident in 2006 will demonstrate the significance of this development and put it in context.

D P World saga

In March 2006, the Dubai-government-owned D P World acquired P&O Ports, then the world’s fourth largest port operator, giving it access to a large portfolio of global port assets. This included a 16.25 per cent stake in South Asia Gateway Terminals (SAGT) in Colombo port.

D P World’s stake in SAGT raised concerns in India. This was because a year earlier in February 2005 it had signed a concession agreement -- after winning a public auction -- to build India’s first container transshipment terminal at Vallarpadam in Cochin Port Trust that was designed to cut India’s dependence on Colombo port, thus saving extra time and cost for exporters and importers.

A container transshipment terminal acts like a hub, into which smaller feeder vessels bring cargo containers which then gets loaded onto larger ships for transportation to final destinations. Larger vessels bring about economies of scale, and lower the cost of operations for shipping lines, which then translates into lower freight rates for exporters and importers.

Due to depth restrictions, large container ships cannot call at India’s ports.

The government’s policy managers felt that D P World would not develop the Vallarpadam facility to its full potential if it held stake in a terminal in rival Colombo port and had conveyed this concern to the Dubai company. Aside the small stake, D P World’s status as the main operator of SAGT roiled India more.

“D P World sold its stake to the majority partner of SAGT and exited the terminal because it did not make sense in having an equity interest in Colombo port when we were focused on developing the Vallarpadam container transshipment terminal,” said a former executive with D P World who was closely involved in building the terminal.

“There was no point in holding stake in a terminal in Colombo port when Vallarpadam was being created by D P World as a transshipment hub to compete with Colombo,” he recalled.

It’s a different matter that Vallarpadam has not lived up to the expectations/mandate for which it was created, even a decade after starting operations in February 2011.

While the government was concerned then about D P World’s equity stake in a terminal in Colombo impacting India’s transshipment plans when it was developing Vallarpadam, will the announcement from Adani Ports and Special Economic Zone Ltd (APSEZ) on building the West Container Terminal (WCT) at Colombo as the lead partner holding 51 per cent stake in a consortium when it is setting up a container transshipment port at Vizhinjam near Thiruvananthapuram in Kerala, raise similar fears now? Particularly when the Vizhinjam project is being supported with viability gap funding from the Central and State governments.

Port consultants say that much water has flown between 2006 and now, making any possibility of such concerns irrelevant.

International geo-politics

APSEZ’s announcement to develop the WCT in Colombo, as a nominee of the Indian government, has more to do with international geo-politics than with container transshipment, said a consultant.

“India has been successful so far in keeping China out of its ports sector. But, it is concerned over China’s advancement closer to India, strategically and politically, through its presence in Colombo port terminal,” he said, while arguing in favour of Indian presence in Colombo.

There is also a view that India walked into a trap set by Sri Lanka to neutralise China’s influence in the region.

“Everyone knows the challenges Sri Lanka is facing over Chinese investments. China literally owns Sri Lanka. Sri Lanka also knows that India is keen on getting a presence in Colombo port to check China. Having an Indian entity to run a terminal in Colombo port is also the best way to ensure that its container transshipment business is protected as Indian cargo containers account for a huge chunk of Colombo’s transshipment volumes,” the consultant said.

“If India doesn’t develop WCT, someone else will do it. Competition or not, anybody else, more so a Chinese firm, developing WCT would have cost India dearly strategically and politically. That’s the whole idea of the government,” he said. “So, from a national perspective, if an Indian entity develops WCT, why not? The revenues will come to India,” he said.

Yet, the announcement from India’s biggest private port operator that it would build the WCT in Colombo flies in the face of public posturing by government officials on promoting container transshipment hubs within India.

No less a person than Prime Minister Narendra Modi himself alluded to this at the opening of the Maritime India Summit on March 2.

“We will take further steps to make V O Chidambaranar Port Trust (VOCPT) a transshipment port on India’s east coast,” Modi said, adding to similar views made by Shipping Minister Mansukh Mandaviya on several occasions earlier. VOCPT has made no secret of its transshipment aspirations and was buoyed by the PM’s statement.

‘Lost opportunity’

“India doesn’t have a proper strategy on container transshipment,” said the consultant mentioned earlier. He blamed the Indian government for not creating a conducive environment that would have helped transshipment to bloom within India. He was particularly critical of the delay in permitting foreign flagged container ships to carry cargo between Indian ports by easing a so-called cabotage rule.

“When there was a capacity crunch in Colombo more than a decade ago, that was the right time to establish India as a transshipment hub. But the Indian government dithered on easing cabotage rule, lost precious time and let the opportunity slip,” the consultant said, adding that India’s rules and regulations did not favour transshipment.

By the time cabotage was relaxed, Colombo had built up more capacity, adding to India’s woes.

Lack of depth and the high vessel related charges in India, particularly at Cochin Port, have been cited for Vallarpadam’s inability to realise its true potential. The vessel related charges at Colombo are cheaper than in Vallarpadam, despite Cochin Port Trust offering steep discounts to promote transhipment.

“With more transshipment hub capacity coming up at Colombo, rates will come down, further widening the rate gap with Indian ports,” said a shipping industry executive.

“Container transshipment doesn’t make sense anymore in India,” he said.

Maritime India Vision 2030

Where does this leave the governments container transshipment hub ambition for India?

Indian Ports handled about 16.1 million twenty-foot equivalent units (TEUs) in 2019. Nearly 75 per cent of this cargo was gateway (12 million TEUs), while about 25 per cent was transshipped en-route to final destinations.

Currently, nearly 75 per cent of India’s transshipped container is handled at ports outside India. Colombo, Singapore and Port Klang handle more than 85 per cent of this ,with Colombo alone handling about 2.5 million TEUs.

India needs to set up transshipment port alternatives that can match competing international ports with regard to location, draft and overall cost economics, according to the Maritime India Vision 2030, a ten-year blueprint for the maritime sector unveiled by Prime Minister Modi on March 2.

Indian ports lose up to $200-220 million of potential revenue each year on transshipment handling of cargo originating/destined for India. The loss is even higher when considering the opportunity to handle cargo emerging from other countries in the region, the Vision document said.

“Given the extra port handling charges incurred at the transshipment hubs, transshipment of cargo results in logistic cost inefficiencies for Indian industry. The additional port handling cost is to the tune of $80-100 per TEU, which could be saved if the container was imported/exported as direct gateway cargo instead of being transshipped,” the Vision document pointed out.

With 75 per cent of the country’s transshipment cargo being handled at international ports, this makes Indian industries vulnerable to increase in costs, potential inefficiencies, and congestion issues and creates long-term risks for India’s trade competitiveness, it said.

A strong economic case, therefore, exists for enabling a transshipment hub in Southern India that can attract Indian and regional transshipment traffic from the current hubs, save significant revenue loss, reduce logistics inefficiencies for Indian trade, reduce risks to country’s export competitiveness and create an opportunity for India to become a large hub for Asia-Africa, Asia-US/Europe container traffic trade.

Vizhinjam, Kanyakumari region and Campbell Bay are promising locations given their position at approximately 6-10 nautical miles (NM) deviation (0.5-1 hours) from the Suez route with potential for deep draft of 20 metres, factors that influence selection of transshipment locations.

Accordingly, the Vision document has suggested prioritizing development of Vizhinjam in the short-term (1-3 years) by providing required support from the Central government.

It also suggested setting up additional transshipment hub in the Kanyakumari region (5-8 years), Campbell Bay (5-8 years) in a phased manner and to enhance transshipment volumes at Vallarpadam (1-2 years).

Adani plans

All these grand plans appear to make little sense now with Adani’s entry into Colombo port with a transshipment terminal designed to handle 3.5 million TEUs a year.

Port and shipping industry sources say that Adani will leverage the Colombo hub to support their Indian terminals.

Adani need not use Indian flag ships to link Colombo with its ports in India.

Adani’s strategy at WCT with regards to its existing container terminals in India has been spelt out by Karan Adani, the chief executive officer and whole-time director of APSEZ.

The project is expected to boost WCT’s container handling capacity and further consolidate Sri Lanka’s locational advantage as one of the world’s top strategic nodes along the busiest global transshipment route, he explained.

“Colombo port is already the most preferred regional hub for transshipment of Indian containers and mainline ship operators with 45 per cent of Colombo’s transshipment volumes either originating from or destined to an Adani port terminal in India,” Karan said.

The network impact of this partnership is expected to benefit from the string of seven container terminals across the 12 ports that APSEZ operate along the Indian coastline handling an annual volume of over 6 million TEUs. This partnership will multiply and accelerate the transshipment options that will become available to serve various shipping lines and other potential port customers across the South Asian waters, benefiting both, India and Sri Lanka in multiple ways, he said.

“The partnership on WCT is a continuation of the deep and mutually beneficial strategic relationship between two neighbouring nations whose history is deeply intertwined. The combination of the strategic location of Colombo port as a launching point for transshipment across the entire subcontinent, the deep domestic strength of SLPA and John Keells Holdings PLC (local partners in the WCT consortium) and the Adani Group’s unmatched network of container terminals across the Indian coastline opens up several dimensions of growth possibilities for years to come, not just within our two countries but also to the east as well as the west of our two nations”, Karan added.

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Published on March 17, 2021
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