APSEZ seeks cessation of coal terminal deal at Vizag Port Trust

P Manoj Mumbai | Updated on November 04, 2020 Published on November 04, 2020

Cites persisting force majeure of over 120 days to quit the deal that helped it enter the eastern coast in 2011

A coal terminal run by Adani Ports and Special Economic Zone Ltd (APSEZ) at Visakhapatnam Port Trust has notified the Central government-run port authority of its intention to “terminate the contract on mutual consent”.

If and when the contract is terminated, it would mark the first instance where India’s biggest private port operator quits a port deal mid-way through a 30-year concession.

In March 2011, APSEZ won the rights in an auction to build a 6.4-million tonnes (mt) a year capacity steam coal import terminal by placing the highest revenue share of 40.10 per cent. The deal was APSEZ’s first facility on the country’s eastern coast.

The Ahmedabad-based infrastructure group built the terminal with an investment of over ₹400 crore, eight months ahead of schedule, and started commercial operations in 2014.

Cargo shortfall

On October 3, the Visakhapatnam Port Trust issued a notice on Adani Vizag Coal Terminal Pvt Ltd, a unit of APSEZ, for shortfall in minimum guaranteed cargo stipulated in the concession agreement.

Adani Vizag Coal Terminal contested the notice, arguing that it was “not valid” as the notified force majeure event due to Covid-19 pandemic was ongoing.

“Also, since the force majeure event has exceeded 120 days, Adani Vizag Coal Terminal has initiated termination on mutual consent as per right under the concession agreement,” APSEZ said in a note explaining its second-quarter financial results.

Operational issues

The terminal has been mired in operational issues since the start and the operator had attempted termination once earlier.

Adani Vizag Coal Terminal suspended operations for about two years from January 2016 citing “operational bottlenecks” arising from “external factors beyond its control”.

The operator said in January 2018 that “the continuance of the terminal in its present form does not appear to be a viable option and the management had requested the port trust to take further action including terminating the concession agreement.”

Th terminal, though, resumed operations in the last quarter of FY18 following some “positive developments” in operations such as permission for road movement and rake availability for cargo evacuation.

The terminal’s revival was also boosted by a rationalisation on revenue share from storage income after it was brought under the stressed project guidelines issued by the Shipping Ministry, raising hopes of an improvement in operating efficiency and cash generation to meet financial obligations. But that didn’t happen.

“The terminal was dogged by three main issues. One, it is a single-cargo/single-process concession. It can only handle imported steam coal for power plants. Two, it can only despatch the cargo by rail, it cannot move the cargo by road under environmental laws,” said a port industry consultant.

“Three, the operator quoted a mind-boggling revenue share of 40.10 per cent. How can anybody make any sense out of it. The terminal needs to service the debt, pay plot rentals, port charges and revenue share on minimum guaranteed cargo stipulated by the contract even if there was a shortfall. So, Adani must have thought it was best to let go of the terminal rather than incur losses continuously,” the consultant said.

Th persistence of force majeure beyond 120 days makes it legally tenable for the operator to seek premature closure of the contract, he added.

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Published on November 04, 2020
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