Logistics

Vizag Port jittery as Adani takes over nearby Gangavaram Port

P Manoj Mumbai | Updated on September 23, 2021

Gangavaram Port started operations by poaching Vizag Steel Plant from Vizag Port

The opening of privately-owned and deep draft Gangavaram Port just 15 kms away in 2008 started the decline of Union government-owned Visakhapatnam Port Trust, till then India’s biggest cargo handler by volumes. Now, the take-over of Gangavaram Portby Adani Ports and Special Economic Zone (APSEZ) will pose the biggest threat yet to its survival.

Unless, the Visakhapatnam Port Trust management moves swiftly to stem further damage to its business.

APSEZ has made its intention very clear as far back as March 3 when it first announced the stake purchase in Gangavaram Port.

“Our strategy for Gangavaram is, it completely opens up a new hinterland for us. Second, if you see the location, it is right next to Vizag Port… today we do not have any large presence in Vizag Port,” said Karan Adani, Chief Executive Officer, APSEZ.

“From Gangavaram Port point of view, we do believe that it can become a strong competition and an alternative to Vizag Port and the ability to take more volume out of Vizag Port will accelerate once we connect it with our remaining 11 ports,” Karan said.

“The third thing is, today Gangavaram Port is only handling bulk and break-bulk, but there is a very good opportunity to develop containers and liquid business,” he added.

Coal

Coal, a big chunk of the cargo of Gangavaram Port, is on take or pay contracts. The biggest customer of coking coal at Gangavaram is the State-owned Vizag Steel Plant, which is directly connected to the port through conveyors.

“This (cargo) will not go (anywhere) and there is a strong possibility of Vizag Steel Plant also going in for expansion and with that the coking coal demand will further increase. Keeping in mind that Vizag Port is just next door and the kind of diversification that Vizag Port has done, I think there is a great opportunity over here to convert this port from only a bulk and break-bulk port into a full-fledged multipurpose port,” Karan added.

Visakhapatnam Port Trust Chairman K Rama Mohana Rao says the port is fully seized of the growing competition from Gangavaram Port.

“We have to face competition, there is no way out. They will poach our customers, so we have to change our style of functioning, we have to change our rate structure and we have to go for dynamic pricing,” he told BusinessLine.

“If we want to survive, we have to be very dynamic. Otherwise, they will eat into our business and we will disappear over a period of time. We are chalking out strategies, we are trying to get more business, we want to reduce rates, we want to be more competitive, we want to modernise and we are going for mechanisation of cargo berths. If we give cargo handling contracts to private entities and give them more flexibility, he will go and get business,” he noted.

In fact, Gangavaram Port started operations by poaching Vizag Steel Plant from Vizag Port, giving it business of more than 4 million tonnes (mt) a year of coking coal and other such raw materials and finished goods of the steel maker from day one.

Slowing growth

Growth slowed at Vizag Port since then. From 56.39 mt of cargo in FY 2007, Visakhapatnam Port Trust’s volumes grew to 69.84 mt in FY21. In comparison, Gangavaram Port handled 32.81 mt of cargo in FY21, starting from scratch in 2008.

Since FY20, the Compounded Annual Growth Rate (CAGR) of Visakhapatnam Port has been negative 0.7 per cent, whereas Gangavaram has been growing at a CAGR of 10.5 per cent.

The efforts of Visakhapatnam Port Trust to compete with Gangavaram by awarding contracts to private firms, including one to APSEZ, for running cargo terminals, have faltered.

Three contracts — APSEZ’s steam coal handling terminal of 6.5 mt capacity, SEW Infrastructure’s steam coal handling facility of 7.5 mt capacity and ALBA Asia’s cargo handling terminal of 6 mt capacity — with total investment of some ₹2,500 crore have been terminated on various grounds.

Another six private operators are struggling due to constraints in the concession agreements and the disputes are currently under arbitration.

The traffic risk in public-private-partnership (PPP) projects at major ports is borne by the private operator, whereas the concession-granting authority secures its revenue through minimum guaranteed cargo mechanism. This makes it difficult for the concessionaire to manage risks.

In spite of due diligence and caution at the time of conceptualising these projects from various perspectives, the survival of some of these projects is at risk due to reasons that were either not foreseen or are beyond the control of the collaborating partners — the concessionaire and the concessioning authority.

“Some of the main reasons for this situation may be the aggressive bidding and the optimistic projections with regard to volumes and rates, unforeseen dynamic changes in the business and absence of flexibility to overcome such dynamic changes in the concession agreements,” said a port industry official.

The situation deteriorated further due to some recent government policy changes which severely impacted the business and created uncertainty on cargo volumes. This, in turn, jeopardised the viability of projects, which did not consider the possibility of fundamental government policy changes at the planning and bidding stage, rendering the terminals un-utilised and hurting the concession granting authority’s revenue share from the private operator.

Visakhapatnam Port Chairman Rao concurs with this view. “The concession agreements that we enter into with private firms have to be more flexible. It should not be close-ended, it has to be more open, flexible and amenable to changes,” he explained.

Port concessions are typically awarded for 30 years.

“I may not know what will happen after ten years leave alone 30 years. But, for 30 years, the private entity can handle only one cargo that is mentioned in the agreement, nothing else. Change in law, external cargo environment and many other factors makes handling one cargo type difficult over the entire 30-year period. Then, that fellow is gone. He spends ₹300-400 crore on the project but can’t handle anything else and if we do something, it will be treated as post-bid modifications and liable to be challenged legally,” Rao said.

The port trust chairman said that he was in favour of allowing single commodity terminals to handle multi commodities.

“We have requested the government to consider allowing single commodity private terminals to handle other cargoes also. There is a committee studying all these parameters, how to give them a chance to handle other cargo. I am very clear, whatever multi cargo you want to handle, you can handle,” he said.

Revenue share

Rao also alluded to the steep revenue share, more than 50 per cent in some cases, quoted by the bidders to win contracts as a risk factor impeding the terminals.

“They can’t survive with single commodity and higher revenue share, and we can’t do post-bid modifications. The committee is going into all these issues, let us see what they will suggest,” Rao said.

“To add to the woes, there is huge competition from Adani-owned Gangavaram Port, which is not governed by rate regulations and is adopting aggressive marketing strategies, offering faster turnaround time, competitive pricing, attractive discounts to end users and has even put restrictions on handling vessels of commodity traders to corner more cargo,” said a shipping industry source.

PPP projects such as the Vizag General Cargo Berth (VGCB), Vizag Seaport (VSPL) and Essar Vizag Terminal (EVTL) have been hit by the aggressive pricing of Gangavaram Port.

“Being a private port, Gangavaram is able to take strategic decisions within minutes and ensure its quick implementation for business growth, whereas VPT is reading the ‘rule book’ and unable to find immediate solutions for problems, leading to diversion of cargo to Gangavaram,” the shipping industry source said.

“This is a disturbing trend that doesn’t bode well for Vizag Port which is already in the doldrums. Despite the stagnant growth over the past decade, VPT has a good potential to handle substantially more traffic by taking revival measures and has a strong opportunity to grow further,” he said.

“Immediate policy reforms must happen in the major port sector to address stiff competition from private ports. Any delay will only turn them into non-performing assets,” he stated.

Port Chairman Rao said that the new Major Port Authorities Act allows major ports “more freedom to fix the rates”.

“That will help us, and we have to be more efficient and make some modifications in the existing arrangements and also go for mechanisation of berths and be competitive in pricing. We have to simplify our procedures. We have to be more investor and business friendly and be like the private sector,” he said.

Towards this aim, all future cargo handling projects will be bid out to the private sector on multi-cargo basis, Rao said.

“Every berth we are going to modernise and mechanise though the PPP route in future will be allowed to handle multi cargo. The private operator will be given the scope to change cargo anytime. We don’t know what will happen in 30 years, who will be there, what will happen. So, he can handle any cargo,” Rao added.

Published on September 23, 2021

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