The case for a container transhipment port at Enayam near Colachel
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Bengaluru: After many unsuccessful attempts spread over more than 15 years, the Kerala government picked Adani Ports and Special Economic Zone Ltd (APSEZ) in 2015 through a public auction to develop and operate Vizhinjam as a container transhipment port for an initial period of 40 years, which can be extended by another 20 years.
The first phase of the Vizhinjam port will have an 800-metre long berth capable of handling 1.2 million twenty-foot equivalent units (TEUs). The berth length will be extended to 2.5km in three phases with a capacity to load 4.3 million TEUs. TEU is the standard size of a container.
Port experts say Vizhinjam has a much better chance of succeeding than Vallarpadam, given the involvement of India’s biggest private port firm and its experience in undertaking transhipment operations in Mundra, India’s biggest commercial port, located in Gujarat.
APSEZ’s association with Mediterranean Shipping Company S.A. (MSC) and CMA CGM SA at Mundra will also come in handy while scouting for a major container line to shift its transhipment hub to Vizhinjam from Colombo. MSC is running a terminal at Mundra in a joint venture with APSEZ while CMA CGM is building a facility on the same model.
Besides, Vizhinjam is located just 18-20 nautical miles from the international east-west shipping route with a deviation of just 2-3 hours, has natural deep draft (depth) of 19 metres with minimal dredging to maintain the depth of the channel, enabling the biggest of the container ships currently afloat to dock.
Hence, it has the potential to emerge as a large trans-shipment hub for trade between the US, Europe, Africa and Asia.
Being a port outside the control of the union government, Vizhinjam is free to set rates on its own, a big advantage over Vallarpadam in its competition with Colombo where only one of the terminals has a depth of 18 metres and that too with the help of dredging. Unlike the landlord model of Vallarpadam, the entire port has been awarded to APSEZ at Vizhinjam.
APSEZ is not required to share any revenue with the Kerala government for the first 15 years after starting operations. From the 16th year of operations, the Kerala government will collect a revenue share from APSEZ that will be equivalent to 1% of the gross revenue from the facility. The revenue share so collected from the private operator will rise by 1% every year till it reaches 40%.
Despite its inherent advantages such as strategic location and deep draft, Vizhinjam required a viability gap funding (VGF) of Rs.1,635 crore, shared equally between the central and Kerala government, to boost its viability.
Enayam: the disrupter
Enayam near Colachel is considered an attractive and potentially the strongest option among all available and proposed port options in South India, according to consultants TYPSA and Boston Consulting Group (BCG).
Its proximity to the mainline shipping route with a deviation of just 14 nm (nautical miles) requiring a travel time of 1-2 hours, availability of natural deep draft of 20 metres to dock big ships, minimal maintenance, dredging and a relatively better perception on labour and ease of doing business compared to Kerala where the other two are located, makes it the best bet for the trans-shipment port location.
The port is planned to be developed as a company and hence free to set rates based on market forces, unlike other Union government-owned ports where rates are regulated by the Tariff Authority for Major Ports.
The potential of Enayam is based on the premise that a significant share of the cargo containers originating from south India and now transshipped via Colombo can be converted into gateway traffic by strategically locating a port near the southern tip of India, thereby reducing transaction costs to exporters and importers of as much as Rs.6,000 per TEU.
In effect, Vallarpadam, Vizhinjam and Enayam will fight for cargo containers from the same hinterland (cargo originating/destined areas) in Tamil Nadu, Kerala, Karnataka and Andhra Pradesh which currently generate as much as 2.3 million TEUs a year.
The project has assumed political overtones. Pon Radhakrishnan, deputy shipping minister, is a law-maker belonging to the Bharatiya Janata Party (BJP) elected from the Kanyakumari constituency in Tamil Nadu, where Enayam is located. Of the 39 lawmakers that Tamil Nadu sends to Parliament, Radhakrishnan is the only BJP representative.
To deflect criticism that all the three transhipment hubs are bunched just a few kms apart, the shipping ministry says that “transhipment hubs in the world tend to be located in clusters”.
Singapore, Port Klang and Tanjung Pelepas (both in Malaysia) are located in the South East Asian cluster while Jebel Ali, Salalah and King Abdulla ports are located in the Middle East cluster. “Multiple ports at the southern tip of India can help in creating similar cluster of transhipment hubs”, the ministry said.
The first phase of Enayam will have a capacity to load 1.6 million TEUs, requiring an investment of Rs.5,840 crore. In the second phase, the capacity will be increased to 6.4 million TEUs with an investment of Rs.10,560 crore. In the third phase, the capacity will be raised to 9.6 million TEUs with an investment of Rs.8,569 crore.
While Enayam has many features that weigh in its favour as a potential transshipment location, it will still be difficult for it to compete and win traffic from Colombo and other competing ports, given their strong incumbent position, TYPSA and BCG wrote in the techno-economic feasibility report for the project. Mint has reviewed a copy of the report.
The consultants have, therefore, suggested five ‘must have’ factors to ensure the success of Enayam. These include easing of cabotage rule, to levy at least a 15% lower port charges than Colombo on transhipment containers for five years to incentivize container lines to shift operations and neutralize the cost involved in re-configuring routes, waiving service tax at Enayam or increasing the discount on port charges to offset the additional cost of service tax, simplifying customs clearance process and making one of the top three global container lines an anchor investor in the first phase of the port.
Enayam’s success, to a great extent, will depend on its ability to convince a major shipping line to become an anchor client and re-route its traffic from the competing ports, it said.
Lines, however, are not willing to play along.
“Enayam doesn’t make any business sense,” says Deepak Tewari, chief executive officer of MSC Agency (India) Pvt. Ltd, the Indian unit of Geneva-based MSC, the world’s second largest container shipping line.
“You won’t get the returns. Because, you are competing with Indian ports when the competition should be with neighbouring ports that are taking away your business,” Tewari, who is also the chairman of the Container Shipping Lines Association (CSLA), said.
“People who are into shipping will not touch it. The government can’t turn around and say I’ll make this port a transhipment hub. It’s not going to bring the business into this place”, said Tewari.
TYPSA and BCG estimated the project internal rate of return (IRR) of 10.8% at above cost of capital but the equity IRR is lower than the expected cost of equity of 16-18%.
To make the project financially viable, VGF of 20-30% (this works out to about Rs.1,170 –Rs.1,750 crore based on a first phase project cost of Rs.5,840 crore) is required, it said.
The consultants have suggested two structures to implement the project. One, get a master concessionaire for an initial period of 30 years which can be extended to 90 years, giving preference to container lines or port operators who can partner with liners to secure volume commitment, bring capital and operational efficiency.
Secondly, if investors/liners are unwilling to take the project risk upfront, adopt the landlord port model wherein the government would invest in developing the common infrastructure such as dredging, reclamation, breakwater, and rail and road connectivity to reduce the risks.
The government could then go for the engineering, procurement and construction (EPC) contract model for development with terminals bid out to private port specialists.
The government has adopted the second route for Enayam with the cabinet clearing a special purpose vehicle (SPV) to be formed with equity investment from the three union government-owned ports in Tamil Nadu—V.O. Chidambaranar Port Trust, Chennai Port Trust and Kamarajar Port Ltd.
The terminal concession would then be awarded on a revenue share basis as per the existing port privatization policy of the union government. This would mirror the problems at Vallaradam and hence, unworkable.
“Enayam will become another Vallarpadam. If the government wants, they can do some acqua-culture, make Enayam a fishing village and leave it at that. Otherwise, it will be like sinking a billion dollars into a black hole for no rhyme or reason,” MSC’s Tewari added.
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