CAG charges on Vizhinjam are baseless

Jose Paul | Updated on January 11, 2018

Port trouble Vizhinjam is dogged by controversies S GOPAKUMAR

Long concession periods are justified given the risk involved in the transhipment business across the globe

Ever since it was conceived some 25 years ago, the Vizhinjam port project has been dogged by several controversies. The latest in the series seems to have arisen on the observations made by the Comptroller and Auditor General (CAG) on issues in the concession agreement entered by Kerala government with Adani Ports.

Based on the nature of the cargo handled, ports are classified into two: gateway ports and transhipment ports. At a transhipment port transfer of cargo takes place from a mother ship to a daughter ship. A gateway port depends largely on its export/import cargo originating from or destined to its hinterland.

Cochin is a gateway port where 90 per cent of the throughput comes from or goes into its hinterland. Vizhinjam as a transhipment port has to depend almost entirely on the cargo volumes brought by mother ships plying on the international shipping routes.

Transhipment ports the world over face an uncertain future and the current market environment is so depressing that even the most well established transhipment ports such as Singapore, HongKong and Tanjung Pelepas in Malaysia are losing traffic volumes heavily.

Moreover, the trend of building mega container ships is halted now and major Container Lines are either cancelling or postponing the delivery of ultra large container vessels already ordered. This would mean less number of mother vessels in service and consequent decline in transhipment volumes.

A very risky business

There is no certainty or guarantee that mother vessels will call at a transhipment port even with a favourable geographical location. Moreover, an investor in the container transhipment terminal at Vizhinjam has to take into account highly efficient transhipment ports in Singapore, Port of Tanjung Pelepas in Malaysia and Colombo in Srilanka. Colombo which is situated just 202 nautical miles from Vizhinjam is now the 25th largest container port in the world, having handled 5.7 million twenty-foot boxes (twenty-foot equivalent unit or TEU is measurement of cargo capacity).

By the time Vizhinjam becomes operational in 2019, Colombo — thanks to a strategic co-operation agreement with China — will have ultra modern container terminals, consolidating its position as a major container transhipment hub in South Asia. Despite four attempts, Vizhinjam did not attract port investors mainly because of the heavy risks involved in the transhipment business.

Concession period

Now, the CAG’s objection is that, as against the normal period of 30 years, the agreement provides for a longer period of 40 years and further extension of 20 years. In major ports, it is true that normal concession for PPP projects is for 30 years.

But major ports make available only terminals or berths for development in an environment where developed infrastructure like roads, rail and inland waterways connectivity exist.

When an entirely new port is to be built on new locations, a longer period is granted to enable the investor to develop basic infrastructure such as breakwater, approach channels, navigational aids, berths, back up area, and equipment.

The concession period given by Andhra Pradesh in 2008 for Krishnapatnam port in Nellore is for 50 years; 30 years with provision for extensions of two 10-year periods up to 50 years. Maharashtra has given a 50-year concession to develop Jaigarh port in Ratnagiri with an option to have another 50 years on mutual consent. Many new concessions in Malta and Latin America are now based on a 40-year period. Very recently, Brazil announced a programme under which current concessionaires can apply for another 25 years even though they may have just renewed the concession for 25 years which, effectively, would mean giving them 49 years. Australia has recently implemented a policy whereby lease holds over port assets are given for 99 years.

The rationale behind giving longer periods of concession for port developers is that port projects have a very long gestation period and the projects are likely to reach breakeven stage only after about 15 years depending on the market environment, capital invested, commodity mix and other relevant factors.

There is an argument that additional decade from 30 to 40 years will help concessionaire get ₹29,129 crore. This is purely a hypothetical calculation based on business projections. It is quite misleading to refer income alone while analysing such projects involving large investment. It would have been prudent if operating expense, revenue sharing, tax payable, Internal Rate of Return (IRR) etc, are taken into account. Strikingly, the CAG report itself agrees that Equity IRR of the Concessionaire is 15 per cent only. Such Equity IRR is within the range of allowable returns in regulated infrastructure projects.

Vizhinjam was considered financially not viable even with a significant financial participation of the Kerala government. That was why the State approached the Centre for viability gap funding and, perhaps, the largest viability gap funding of ₹818 crore or 20 per cent of the project cost was granted for this project.

Yet, only a single bidder — Adani Ports — came forward to take up this project, because of the heavy risks involved in the transhipment business. With a concession period of 40 years if only one bidder came forward how many would have come forward had a shorter period of 30 years been fixed?

None would have quoted and the fifth attempt also would have resulted in failure. The state was left with one choice and it wisely chose the first one.

State investment

The CAG says in the investment of ₹7,525 crore, about 67 per cent of the costs is borne by the State and only 33 per cent by Adani Ports. Seaports involve what economists call “public goods”. Public goods are goods or services which are unlikely to be provided sufficiently and satisfactorily by the private sector.

The provision of breakwaters, dredged approach channel, navigational aids, communication, pilotage are special cases of “public goods” and for reasons which also apply to uncongested bridges and roads. State or the Centre will be the ideal agency to provide such “public goods”. Private sector will be the right agency to get involved in building berths, container yards, cranes, handling equipment and the actual cargo operations of a port.

In Vizhinjam, the State is building breakwaters: a very important item of port infrastructure in addition to providing road and rail connectivity, power, water supply, acquisition of land and back up area to make the port an attractive destination for investment. Kerala’s share in the total investment has gone up to 67 per cent for this reason. In the absence of such substantial State/Central investment, no investor would have shown interest in Vizhinjam.

The development strategy of Vizhinjam should base on what India will stand to gain. About 73 per cent of Colombo’s container traffic is Indian cargo and out of a total volume of 5.7 million TEU handled in 2016, Indian cargo represents 4.16 million TEU. The value would come to $50 billion (₹32,5000 crore). It would be a shame if Indian cargo continues to get transhipped via Colombo. Vizhinjam alone can change that.

The writer is former chairman of Mormugao Port Trust

Published on July 11, 2017

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