Bangalore: PSA International Pte Ltd took its biggest gamble in India when it pitched a record bid last June for a container loading facility at Jawaharlal Nehru (JN) port, but now finds the odds stacked against it because of the very bid.
A consortium led by PSA, the world’s second-biggest container port operator, quoted a revenue share of nearly 51% for the Rs 6,700 crore project, the highest quoted by a private operator in the history of India’s container port privatization programme that began in 1997. That’s far higher than the average revenue share of 35-40% for such projects.
Cargo-handling contracts at Union government-controlled ports such as JN port are decided on the basis of revenue share—the bidder agreeing to share the highest quantum of annual revenue with the port wins the contract, typically stretching 30 years.
The first sign of strain in the project came to the fore a few days ago when PSA indefinitely pulled out of an event, slated for 11 January, to sign a concession agreement with JN port. The issue was over who would bear the stamp duty for registering the document. The duty is a matter of debate: It can range between Rs 50 crore and Rs 335 crore, depending on what basis it is calculated. This hasn’t been decided yet. The pull-out has added to speculation in the port industry that PSA was looking for an excuse to quit the project after it made the record bid only to find it unfeasible. Mint could not ascertain this.
A concession agreement is crucial because it lays down the terms and conditions of contract and sets a project in motion.
A JN port official said the agreement will now be signed only after the stalemate over the stamp duty is sorted out. No one can say when this will happen. Even if this issue is resolved and the agreement signed, the next hurdle will lie in getting banks to lend for the construction of the terminal.
Bankers say PSA will find it difficult to get project finance from banks without a corporate guarantee. “With huge investment obligations and a revenue share of close to 51%, it will be impossible for PSA to get funds for this project,” said a senior director in charge of project finance at a state-backed lender. He did not want to be named because of the bank’s policy on speaking to the media.
The project will be “extremely challenging for both PSA and the lenders,” said Jonathan Beard, executive director and global practice leader (ports, airports, logistics and transport services) at London-based consultancy firm GHK Holdings Ltd and the managing director of its Hong Kong office.
“It would need the demand assumptions to be at the top end of projected ranges, smooth operations with no major disruptions, and limited competition for the origin-destination cargo pool,” Beard said in an email on Tuesday. “In other words, all your assumptions need to be positive—there’s little scope for a downside.”
A PSA spokesperson said the firm had “no comments” to offer, in response to a detailed questionnaire sent to the company on Monday.
“PSA has taken a very big gamble,” said Jimmy Sarbh, chairman of port consultancy Sarbh Maritime Pvt. Ltd. Sarbh is a former chairman of Nhava Sheva International Container Terminal Pvt. Ltd, one of the two private container loading facilities operating at JN port.
There are several reasons for these apprehensions. Apart from the revenue share, PSA has to pay about 8% as lease rent every year to JN port on the land it creates through reclamation.
PSA will have to relocate a liquid cargo jetty run by state-run oil refiner Bharat Petroleum Corp. Ltd and situated in the vicinity of the new container terminal, and reclaim huge tracts of land from the sea.
Also, the new terminal has an environment clearance to load only three million standard containers in a year, whereas the tender mentions handling 4.8 million standard containers in a year. Experts reckon the new terminal will break even only when it can load 3.8 million standard containers a year. Typically, an operator would need seven to eight years to reach that stage.
Moreover, PSA may have to invest a few crores of rupees to build a new approach road or a flyover to the facility and erect electric sub-stations to supply power. The tender is not clear as to who will bear the cost of acquiring land to build the external infrastructure such as road and rail lines and who will maintain them.
Adding to these, the port tariff regulator has set upfront the rates PSA can charge from its customers at the JN port terminal. The rates will be valid for the entire 30-year duration of the contract, except for the automatic indexation to inflation to the extent of 60%.
Already, the cost of the JN port project has been pushed up by at least Rs 600 crore because of a slew of court cases that delayed the project by almost two years.
PSA, owned by Temasek Holdings Pte Ltd, the sovereign wealth fund of Singapore, was one of the first to enter India when it opened its ports to private investments in the late 1990s. In India, PSA runs facilities at Chennai, Tuticorin, Kandla and Kolkata ports, and globally, it runs 29 port terminals in 17 countries that together loaded 57.09 million standard containers in 2011.
PSA’s record offer left many in the port industry shaking their heads in disbelief. The next highest bid was 35.51% submitted by a consortium comprising Sterlite Industries India Ltd and Leighton Contractors (India) Pvt. Ltd.
“The new terminal has become a non-starter. The project is not viable with this kind of revenue share,” said an executive with one of the groups that bid for the project but lost. The executive declined to allow him or his company to be identified.
“JNP is a key port and any serious international player would want to have it within its portfolio. Nonetheless, PSA seems to be paying a high price,” GHK’s Beard added.
After sharing 51% of the annual revenue from the terminal with the port, PSA will have to fund the operational cost, debt service obligations, depreciation and taxes from the balance 41%, after factoring in the 8% lease rent.
“At a revenue share of 50.828%, PSA will be left with nothing,” said an executive at the India office of a UK-based port consultancy firm, who, too, declined to be identified. “In fact, it will lose money in the initial years of the project and will have to put money from its own pocket to service the debt.”
PSA’s rival APM Terminals Management BV, which went to the Supreme Court to be allowed to bid for the project after being denied permission by the government citing a policy decision, finally backed out without submitting a bid after winning the apex court’s approval. “The project was not financially viable because the projected revenue did not justify the project costs,” Hans-Ole Madsen, vice-president, business development for Africa, the Middle East and India Region at APM Terminals, had said in an interview in June.
PSA can walk out of the project before it signs the concession agreement with JN port, but it will have to forfeit the bank guarantee of Rs 67 crore. Abandoning the project will also attract a ban on participating in Union government port auctions in future, according to the model request for qualification document finalized by the government in 2007.
For JN port, starting afresh would mean delaying the project by at least two years, to 2018. Already, its three terminals are loading more than their combined capacity for 3.6 million standard containers in a year. In 2010-11, the port handled 4.27 million standard containers. It cannot handle more unless it expands capacity.