Can India’s container transhipment hubs take on Colombo?

Inability to tackle and address issues that facilitate transhipment could torpedo push to develop domestic alternatives


About 2.8 million twenty foot equivalent units or about 25% of India’s cargo containers are currently transhipped at ports outside India.
About 2.8 million twenty foot equivalent units or about 25% of India’s cargo containers are currently transhipped at ports outside India.

Bangalore: India is spending a few billion dollars to build so-called container transhipment ports to cut its dependence on facilities located in Colombo and Singapore to send and receive about a fourth of its annual container cargo. But its inability to tackle and address issues that facilitate transhipment could torpedo the objective.

A container transhipment terminal acts like a hub, into which smaller feeder vessels bring cargo that then gets loaded onto larger ships for transportation to final destinations. Larger vessels bring about economies of scale and lower the cost of operations for shipping lines, which then translates into lower freight rates for exporters and importers.

Due to depth restrictions, bigger container ships cannot call at India’s ports located close to the international east-west trade route, which accounts for 80% of India’s transhipment containers and most of East Asia’s trade with Europe. Ports on India’s west coast are mostly gateway ports that send cargo containers directly to destinations while those on the east coast rely on transhipment at nearby hubs.

About 2.8 million twenty foot equivalent units (TEUs) or about 25% of India’s cargo containers are currently transhipped at ports outside India mainly at Colombo, Singapore, Port Klang, Salalah and Jebel Ali which builds inefficiencies in logistics and raise costs. Of this, Colombo alone accounts for 1.2 million TEUs.

A TEU is the standard size of a cargo container and a common measure of capacity in the container business.Viewed from another angle, around 78% of container traffic from India’s east coast ports is trans-shipped. There are only a few ports in south India that have the water depth to match global cargo handling efficiencies and function as a transshipment hub.

Exporters and importers in south India incur an additional charge of Rs.5,000-Rs.6,000 per TEU due to extra port handling at transshipment hubs, making them less competitive, adding huge costs to the economy and resulting in Indian ports losing as much as Rs.1,500 crore per year in business. India is also losing out on the opportunity to become a large hub for Asia–Africa, Asia-US/ Europe container traffic trade, according to the shipping ministry.

“There is a strong economic case for developing a new container (transhipment) port in India that can attract Indian and regional trans-shipment traffic back from the current hubs,” says consultants Typsa Group and and Boston Consulting Group, which wrote the techno economic feasibility report for a new container transhipment port at Enayam in Tamil Nadu. ,

Enayam, located close to Colachel in Tamil Nadu’s Kanyakumari district on the country’s southern tip, is touted as India’s best bet to counter Colombo in its search for an ideal location to build a transhipment port of its own.

On 5 July, the union cabinet approved the construction of the new port, estimated to cost about Rs 24,969 crore, in three phases. It will be able to load 9.6 million TEUs a year.

Just 36 km away at Vizhinjam in neighbouring Kerala, Adani Ports and Special Economic Zone Ltd (APSEZ) has started work on building a container transhipment port entailing an investment of Rs.7,525 crore in the first phase.

Meanwhile, some 225 kms away at Vallarpadam in union government-owned Cochin Port, the first experiment with a transhipment hub is floundering. Dubai-government owned D P World Ltd is struggling with the transhipment terminal since starting operations in February 2011. The terminal was built with an investment of Rs.2,900 crore, of which the Indian government contributed Rs.1,700 crore, while the Dubai government-owned entity spent Rs.1,200 crore.

All three have been conceived with the same objective: Moving back transhipment of Indian and Indian sub-continent cargo containers to an Indian port.

First mover

Mainline container carriers typically look for minimum deviation from their routes when selecting a trans-shipment port. Vallarpadam is 76 nautical miles (nm) away from the busy Suez route, entailing an extra sailing time of as much as 8 hours compared with Colombo, which is 19 nm away with just an hour’s journey.

Shipping liners typically take a long term view when deciding their preferred trans-shipment port given the costs of re-configuring existing route networks. Scale and assurance of traffic are two key factors that influence this decision.

“Vallarpadam has not even caused a scratch on the back of Colombo through which most of India’s transhipment cargo containers are routed to final destinations,” says J.S. Gill, managing director at the India unit of Singapore-based Sea Consortium Pte Ltd., which runs the world’s largest independent common carrier of containers under the brand name X-Press Feeders.

Vallarpadam is prone to siltation and requires dredging to make the channel navigable for ships throughout the year, entailing huge costs. Dredging costs are typically priced into the vessel related charges that ships pay to call at a port. The port calling costs at Colombo are one-tenth of the costs at Vallarpadam. This makes competing with Colombo an extremely difficult task. “Colombo can give that level of port costs because it is a volumes game,” says Gill. Colombo gets more ship calls in a week by offering much lower port costs. More ship calls means more money.

In fact, the revenue share that D P World is contractually-mandated to pay Cochin Port Trust for operating Vallarpadam on a 30-year contract does not even cover the money that the Port Trust spends every year just to make its channel navigable.

To add to the woes, a depth of 14.5 metres at Vallarpadam is insufficient to attract big mainline ships with a capacity to carry over 10,000 TEUs.

Vallarpadam was further hit by India’s notorious red tape. Twenty months after its February 2011 start, the then cabinet eased a key local law allowing foreign flagged container ships to ply between Vallarpadam and other Indian ports carrying export-import containers. This relaxation ended in September 2015 after a three-year run.

Only Indian-registered ships are allowed to ply on local routes for carrying cargo, according to the cabotage rule, which is a sovereign right used to protect the local shipping industry from foreign competition and for the purpose of national security.

Losing out

The ICTT operates from a special economic zone (SEZ) that grants fiscal concessions and procedural ease at par with competing global terminals. But a jurisdictional issue between the Customs and the SEZ authorities over clearance of transhipment containers cost precious time for the terminal during its initial days.

Colombo consolidated its position while Vallarpadam was struggling for approvals and procedures to fall in place. In the year ended March 2015, Vallarpadam loaded 419,555 twenty foot equivalent units or TEUs, of which a paltry 21,045 TEUs were transhipment containers.

“When you go for this kind of project you have to lift all barriers,” says Gill. “Give blanket approvals and go all out. Get any business, every business. Then there is fun in working; fun in going out and telling shipping lines we have something with which we can beat others. We can go to a big carrier like Maersk Line and tell him why are you going to Colombo as your large transhipment hub. You have to shift one big line lock stock and barrel into the terminal like what happened with Tanjung Pelapas in Malaysia. There was no way Pelepas could compete with Singapore, which is one of the world’s largest transhipment hubs. What they did, they gave Maersk Line one royal package and Maersk withdrew lock stock and barrel from Singapore and shifted to Pelepas as its transhipment hub. Once they moved to Pelepas, a few of its service partners also shifted to Pelepas and it was finally full. They should have done something like this at Vallarpadam with a Maersk Line, Mediterranean Shipping Co S A (MSC) or CMA-CGM S A (the top three global container lines),” Gill added.

Besides, Vallarpadam has to share 33.30% of its annual revenue with the union government-owned port and its rates are set by the Tariff Authority for Major Ports (TAMP). India is setting up new ports to tap the potential in container traffic that has been growing at a compound annual growth rate (CAGR) of 10% over the last decade. The growth trajectory is expected to continue with GDP projected to grow by 7-8% a year.

But, unlike gateway ports that are totally dependent on cargo originating from their hinterland, transhipment is a different ball game altogether. A transhipment port is dependent on other ports for aggregation of volumes.

Pure business

“Transhipment is purely a cost game,” said an executive heading the logistics and transportation practice at the Indian office of one of the global consulting firms.

If you really want to enter the transhipment business, you have to slash the rates by half to compete with Colombo, he said. “If a terminal is offering even $10 less, lines will move lock stock and barrel; they don’t have any love lost for Colombo or any transhipment port/terminal for that matter. It’s also a purely shipping lines driven business where lines have a big role to play in making transhipment a success,” he added.

For instance, 70% of Colombo’s traffic is transhipment containers originating from or destined for other countries in the region such as India.

“If you are paying 33.30% as revenue share assuming a rate of Rs.4,000 a container and suddenly you want to handle at Rs.2,000 of which 33.30% has to be given to the government-owned port, what is left for the developer. That’s why D P World has not been successful at Vallarpadam. Whatever they say, the landlord port concept (whereby the ownership of the port remains with the government while the terminal operations are outsourced to private firms for 30 years on a revenue share model) will never work for transhipment,” he said asking not to be named because of conflict of interest since his firm advices the shipping ministry on policy matters.

Given the lack of adequate capacity of Indian registered feeder ships, permitting foreign ships to ply on local routes to feed transhipment ports has become a key necessity. On 7 March, the shipping ministry relaxed cabotage restrictions for transportation of export-import (EXIM) loaded and empty containers on foreign containers ships on local routes for aggregation of containers to facilitate transhipment.

New or existing container ports handling transhipment traffic can apply for cabotage relaxation to the directorate general of shipping (DGS) who shall grant relaxation for a period of one year for an existing port and two years for a new port (including a gestation period of one year), the ministry said in a circular.

An existing container handling port should tranship 50% or more of the containers handled during the first year while a new port will have to achieve this level in the second year. Otherwise, the relaxation will be revoked. The container handling port whose relaxation is revoked shall not be considered for cabotage relaxation for the next three years, according to the circular.

“This is absurd,” says the India head of a European container shipping line. “In the absence of long-term cabotage relaxation, foreign container lines will not do trial runs for a year to convert a port into a transhipment hub. Lines will not come without a long-term perspective,” he added.

“The purpose behind the government’s objective of cabotage relaxation is to attract Indian containers transshipped through foreign hub ports to Indian ports. However, the conditions imposed for availing cabotage relaxation are so stringent and unrealistic that none of the existing ports/terminals/new ports will be in a position to meet them. Thus, the entire move will be a non-starter,” the Indian Private Ports and Terminals Association (IPPTA), a private port lobby, said urging the ministry to review the policy.

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