BackCargo contracts begin to crumble as government ports default on obligations
Sesa Sterlite decision to call off Vizag deal a setback for a key infrastructure sector struggling with tariff issues and weak cargo volumes
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For Sesa Sterlite Ltd, a unit of Vedanta Resources Plc, the incident came as a rude shock—one that showed the careless attitude of a state-owned port in India in fulfilling its obligations on a cargo-handling contract implemented through a so-called public-private partnership (PPP) model. It is also fast turning into a worrisome trend that threatens to jeopardize India’s plan to expand capacity at its dozen state-owned ports with private funds.
At the time of starting commercial operations in January 2013 from a general cargo berth it had upgraded and automated to handle coal at the outer harbour of Visakhapatnam port on India’s eastern coast, Vizag General Cargo Berth Pvt. Ltd (VGCB) was “astonished" to find that the water depth at the approach/entrance channel to the berth was not 20 metres.
Deepening the channel to 20 metres and maintaining it at that level to help dock the biggest of the dry bulk cargo carriers—called capesize ships—was a key obligation that Vizag port took upon itself while signing a concession agreement with VGCB on 10 June 2010. This obligation was written into the concession agreement, a document that sets out the terms and conditions of a port contract.
VGCB is the entity set up by Sesa Sterlite to develop and run the facility after winning the project in a public tender. It repeatedly brought the failure to dredge the channel to the level mentioned in the agreement to the notice of the port authority since April 2013 in order to get the problem fixed after the firm realized that it would not be able to handle capesize ships at the berth, which was the foundation of the project.
Exasperated by the lack of response from the port authority, VGCB finally pulled the plug on the project where it had invested ₹ 638 crore by issuing a termination notice to the port in November.
This trend started last year.
In November 2012, just six years into a 30-year contract, ABG Infralogistics Ltd terminated the deal to run a container loading facility at Kandla port on India’s western coast, citing the port authority’s failure to honour its contractual obligations relating to dredging, night navigation, rail connectivity and back-up land, among 27 counts of default.
When the dispute went into litigation, the high court in the state of Gujarat, where the port is located, directed the port authority to take over the failed terminal after paying ₹ 110 crore as lenders’ dues. The issue of payment of equity put in by the terminal operator as well as compensation due to default by the port authority has been referred for arbitration.
A few months ago, Gammon Infrastructure Projects Ltd sought ₹ 350 crore as compensation from Mumbai port, also on the western coast, for failure to fulfill its obligations that have delayed the opening of a container terminal the firm is building there on PPP model.
Gammon has completed the construction of the berth for the ₹ 1,228-crore project it won in a public auction in December 2007, but is unable to start operations because the port is yet to complete dredging work and hand over the entire back-up area required to store containers. The project was originally slated to begin operations in December 2010. The facility is now expected to open in April 2015.
The delay has escalated the project cost to more than ₹ 1,500 crore.
Many more port contracts are likely to fall victim soon due to the failure of state-owned port trusts to keep up with contractual obligations. This will dent investor confidence in India’s port privatization programme at a time when the country is struggling to attract private funds to add capacity. Recent port tenders have seen very few bids, with some failing to get any bids at all.
State-owned ports have to get the channel deepening work done with their own funds by hiring contractors. Private terminal operators have no role to play in this.
What is galling in the case of the Vizag project is that the port authority misrepresented facts on dredging of the channel. In a written pre-bid clarification for the project as far back as November 2009, the port stated that the “channel depth was already 20 metres" and that “200,000 tonne vessels can be handled in the approach/entrance channel even as on that date". This formed the basis on which bidding groups, including Sesa Sterlite, assessed the project and placed their price bids.
The concession agreement was signed based on this presumption and the agreement even incorporated a disclosure that the channel was “dredged to a depth of 20 metres".
The PPP model at Vizag was based on the traffic to be generated from capesize ships calling at the facility and the revenue accruing thereon. Based on this, VGCB had agreed to share 38.1% of annual revenue—the highest price bid—with Vizag port trust to win the deal.
The claim made by Vizag port that the water depth at outer harbour approach/entrance channel was 20 metres turned out to be false. As a result of this default, VGCB has not been able to handle any capesize ships—the most important aspect of the project—since it started operations in January 2013, hurting its viability.
The decision of Sesa Sterlite to terminate the Vizag deal is a setback for a key infrastructure sector struggling with tariff issues and weak cargo volumes.
These incidents show the inept handling of PPP port projects by port trusts, resulting in delays and cost overruns, hurting the profitability and viability of projects. Until the port trusts realize that complying with contractual obligations is intrinsic to the success of PPP port contracts, private investments will be hard to come by. After all, the true essence of a PPP project lies in both the parties delivering on their contractual obligations and commitments and not just one side doing so. The sooner this issue is fixed, the better it is for India’s ports sector.
P. Manoj looks at trends in the shipping industry.
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