ArcelorMittal-Essar tussle over Hazira port leaves Gujarat government at sea

P Manoj Mumbai | Updated on March 03, 2020 Published on March 03, 2020

With eye on new port policy, Essar says the steel mill is captive to its port; ArcelorMittal insisits the port is captive to the mill it has purchased

The Gujarat Maritime Board (GMB), the agency tasked with the development and regulation of non-Central government ports in the State, is in a quandary, something of its own making.

The GMB will have to decide whether the captive port run by Essar Bulk Terminal Ltd (ETBL) at Hazira is indeed a captive facility, following the acquisition of Essar Steel by ArcelorMittal Nippon Steel India Ltd (AM-NS) for about ₹42,000 crore. The port is ‘captive’ to Essar’s steel mill located close to it.

AM-NS had made the acquisition under the Insolvency and Bankruptcy Code (IBC) in a deal that excluded the captive port.

The Board’s decision is key to Essar, which has filed an application with the regulator seeking to take advantage of a new captive port policy announced by the State government last October. The policy allowed captive ports to handle third-party cargo to the extent of 100 per cent after signing a supplementary pact.

For Lakshmi Mittal-owned ArcelorMittal, bringing the captive facility under its fold is critical to running the steel mill. The steel behemoth is lobbying the State government to get this done, arguing, perhaps logically, that the port is captive to the industry. If that is so, the captive port should belong to it because the industry in this case is the steel plant it acquired from Essar.

Decades-long issue

Resolving the issue calls for the undoing of an ‘aberration’ that has been in existence since the late 1990s, when GMB allowed private funds to build ports including captive facilities.

Despite being a captive facility to the steel plant, the port and the steel mill in Hazira were run by two separate companies of the Essar Group. Experts argue that if a facility has to be treated as a captive one, it should belong to the company that runs the industrial plant and not be an independent entity owned by another company. If the latter is the case, it takes away the captive nature of the facility and makes it a greenfield port, where the licence/concession terms are vastly different.

To be sure, Essar is not alone in adopting the “common practice” of putting its captive port linked to an industrial plant in Gujarat under a separate, independent company due to “technical expertise and commercial requirements”. Mukesh Ambani-owned Reliance Industries Ltd has done this for its refining and petrochemicals complex at Jamnagar, where its captive jetty is run by a separate company within the group. So is the case with the Aditya Birla Group, which runs a copper smelter at Dahej that has a captive jetty attached to it.

The financial angle

This regulatory issue has been compounded by a financial angle. Typically, a captive port is the cheapest way of handling cargo. But the tariff, transfer pricing, margin, commercial or financial benefits which the owners of the industrial plants and the captive jetties enjoy were never examined or analysed by the regulator. A captive facility cannot set tariffs independently — it can only operate on a cost basis.

The GMB never bothered with the finer differences so long as it was getting its wharfage and other revenue without harming the State exchequer. But ArcelorMittal’s takeover of the steel plant has blown the lid off the issue.

“ETBL, Hazira is a separate legal entity and an independent company that signed an MoU with GMB at (the event) Vibrant Gujarat 2007, followed by licence agreements with GMB in 2010 and 2017,” a spokesman for ETBL told BusinessLine.

“Since inception, EBTL has made significant investments to develop a deep-water port facility at Hazira. In contrast, Essar Steel, now ArcelorMittal Nippon Steel India, has not made any material financial investment, and has an equity ownership of 26 per cent in EBTL. Essar Steel was acquired by ArcelorMittal and Nippon Steel under the IBC, and EBTL was not part of this acquisition. EBTL continues to provide uninterrupted services to AM-NS India under the existing commercial contracts (signed between the steel plant and the captive port),” the spokesman added.

The 26 per cent stake held by the steel plant in the captive port could thus become a blessing in disguise for Essar to argue before the GMB that “there was no change in the nature of the port services to ArcelorMittal” and that the new owner of the steel plant “is a captive user of the Hazira port facility”. By putting forward this logic, Essar hopes to convince the GMB that it came “under the purview of the new captive port policy”.

GMB is roiled by this matter and the issue has generated much heat in government circles. “All I can say at this stage is that the representations of both the parties are under the active consideration/examination of the Government of Gujarat,” Mukesh Kumar, Vice-Chairman and CEO of GMB, told BusinessLine.

A B2B subject?

However, another official, with the State’s Ports Department, said this was “more of a B2B issue which has to be sorted out between Essar and Arcelor Mittal”.

Experts see this statement of the port official as “very significant” given the “insight” it reveals on the current state of mind of the Gujarat government. “Going by this statement, the government’s first reaction will be, ‘don’t trouble me, you sort it out amongst yourselves’. The official has let out GMB’s current state of mind, which could change over time,” an industry official said.

“The problem is the GMB should not have allowed the captive facilities to go into independent companies. That is the mistake that the GMB has done. A captive port cannot be an independent company. The word ‘captive’ itself means it has to be together and cannot operate as an independent port, even allowing tariffs to be set when it is a cost item for the industrial plant. Once you become a captive, there is a certain regulatory framework which is applicable. Essar’s Hazira port is enjoying both the things — it is independent as well as captive,” he added.

“It is imperative that the GMB factors in the change in captiveness of its regulated ports due to the change in the ownership of the industrial or port assets in its new captive port policy to withstand mergers and acquisitions headwinds,” said Ramesh Singhal, Director at i-maritime Consultancy Pvt Ltd.

“Many years ago, the GMB had refused permission to transfer the ownership of Birla Copper’s captive port — Dahej Harbour and Infrastructure Ltd — to a foreign investor, as this could affect the captiveness of the port project,” he added.

Essar’s Hazira facility has thus become the litmus test for Gujarat’s new captive port policy. The group’s bid to expand Hazira by taking advantage of the new policy could face trouble if it is no longer considered ‘captive’ to the steel plant.

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Published on March 03, 2020
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