Auction process for dredging works should be made accountable
The high cost of dredging—deepening and maintaining port channels—is often cited as the main reason why ship calling costs, or so-called vessel-related charges, are high at Indian ports, compared with other harbours in Asia.
This is because dredging costs are recovered from ships docking at the ports to unload and load cargo.
That makes it difficult for many Indian ports to offer competitive rates to shipowners who are constantly looking for ports with lower rates to include in their route network in a bid to cut operating costs at a time when the freight rates have fallen drastically.
But now, some of India’s state-owned ports have reasons to smile. They are getting price quotations for dredging works that are close to half of the cost estimated by the port authorities.
A few days ago, Kamarajar Port Ltd, the state-owned entity that runs the port at Ennore near Chennai on the eastern coast, received a lowest price quotation of Rs.258 crore from International Seaport Dredging Pvt. Ltd (ISDPL) that is less than half of the Rs.580 crore budgeted by the port authority for the work.
The port authority had called for bids under phase-V of the dredging plan to deepen the port channel for allowing the so-called capesize ships—the biggest of the dry bulk ocean carriers—to call.
In January, state-owned Dredging Corp. of India Ltd quoted Rs.192 crore to deepen the channel of Mormugao Port, also state-owned, to accommodate capesize ships. Mormugao had approved a cost estimate of Rs.380 crore for the work.
Similar instances of dredging contractors quoting way below the estimated cost were witnessed at Tuna-Tekra, the satellite facility of Kandla Port, and at VO Chidambaranar Port.
Even for phase-IV of dredging at Kamarajar Port in early 2015, ISDPL had quoted Rs.260 crore, against a budget of Rs.406 crore.
While dredging costs that are 45-60% of the budget gives elbow room for the port authorities to lower their vessel-related charges, the dredging industry has started questioning the sanctity of the cost estimates worked out by the port authorities.
Something is seriously, fundamentally wrong with the way cost estimates are worked out by port authorities ahead of putting the project to tender.
Otherwise, why would bidders quote such low rates?
So, are the bidders more realistic in their assessment of the project costs than the public port authorities, given the fact that the cost estimates were found to be exorbitant? I would presume so.
Even assuming that a recession in the global dredging market is driving firms to drop rates to win contracts does little to justify the wide variations in the cost estimates and the actual bid.
This would, in turn, shift the focus on the procedure adopted for preparing detailed projects reports and calculation of project cost including accounting for work variations.
Unlike in India, bids for global dredging works are mostly in tandem with the cost estimates, suggesting that the issue of computing estimated cost for projects has become questionable.
Whether ports adopt international or national standards for cost estimation, whether they have consultants and experts who can do proper soil modelling to arrive at production and cost estimate, or do the ports themselves do their groundwork and assessment of the work involved, or do the port authorities and policymakers totally rely on the consultants and experts to estimate the production and cost of the project.
It also brings into focus the role played by many new consulting firms that have cropped up in the dredging sector and who are hired by the public port authorities to prepare detailed project reports and work out cost estimates.
This problem is not evident at private ports run by companies such as the Adani Group that have set up dredging units to meet their own in-house dredging needs.
Purchasing dredging equipment for their own captive uses, while requiring huge investments initially, will spare private firms many a heart ache arising from the vagaries of the market.
This is not to suggest that India’s state-owned ports should start buying dredgers to meet their needs.
This job is better left to experts so that ports can concentrate on their core competence.
With several dredging projects being lined up by the shipping ministry for development of new ports and modernization of existing ones, proper estimation of cost assume significance.
Consultants, public port authorities, policymakers and administrators need to introspect on making the tendering process financially accountable to secure the best outcomes.
P. Manoj looks at trends in the shipping industry.