Valuation mismatch stalls re-tendering of Gammon’s failed container terminal at Mumbai Port4 min read . Updated: 25 Jan 2016, 05:16 PM IST
SBI Capital Markets has worked out the base price at Rs549 crore while Gammon Infrastructure is asking for a base price of Rs1,271 crore
Bengaluru: Gammon Infrastructure Projects Ltd has sought an asset replacement value that is more than double the amount worked out by the government through an independent agency, to agree for re-tendering a container terminal it has built at Mumbai Port, potentially stalling efforts to revive the failed project by changing the cargo mix to include other clean cargo such as automobiles and steel coils.
SBI Capital Markets Ltd, the agency appointed by the government, has worked out the project asset replacement value or base price at ₹ 549 crore while Gammon Infrastructure is asking for a base price of ₹ 1,271 crore, according to a spokesman for the shipping ministry.
If Gammon Infrastructure decides to match the highest revenue share price bid, in case it is not the highest bidder during the tendering process, by exercising a so-called right of first refusal, the asset replacement value would be meaningless because the Mumbai-listed firm would be the project operator under revised terms.
But, if Gammon Infrastructure decides not to exercise its right of first refusal to match the highest bid, the new operator of the project will have to pay an upfront amount to Mumbai Port Trust that is equivalent to the asset replacement value or base price agreed by the Mumbai Port Trust and Gammon Infrastructure.
The replacement value of project assets worked out by SBI Caps is almost equal to the money (principal amount) lend by banks to the project, which has now turned non-performing assets (NPAs) in their books.
Typically, the replacement value of project assets is used to compensate the project operator for his investment in the project, in the event of termination of contract due to default of the government-owned port trust.
But, in this case, the upfront amount (asset replacement vale) to be paid by a new operator will not be given to Gammon Infrastructure because it has defaulted on the loan, which has turned sticky. The lenders will invoke their step-in right to claim that amount which will also help the port trust hand over the project asset to the new operator without any encumbrance.
“SBI Caps was given the mandate of working out the asset replacement value and vet the detailed feasibility report for the project with revised cargo mix. But, to push its case, Gammon Infrastructure carried out its own valuation and set the base price at ₹ 1,271 crore. It is not Gammon’s job; it is not expected to do this. Asset replacement valuation is the mandate for SBI Caps. Gammon has to give the detailed feasibility report only," the ministry spokesman added.
“Gammon’s demand for a higher asset replacement value makes it clear that it is looking to exit the project," the spokesman said.
Canara Bank, Punjab National Bank, State Bank of India, Uco Bank and India Infrastructure Finance Co. Ltd (IIFCL) had lend ₹ 706 crore (now around ₹ 900 crore with interest) to the project which has been delayed by five years due to reasons over which the project promoters had no control.
It is also part of a clutch of port projects that are stalled due to delays in regulatory approvals and non-fulfilment of sovereign obligations, putting stress on lenders to the projects. The government is looking to revive some of these projects by changing the cargo profile.
A joint venture between Gammon Infrastructure and Spanish port operator Dragados SPL SA had won the rights in 2007 to develop and operate the new container terminal for 30 years. The consortium agreed to share 35.064% of its annual revenue with the Union government-controlled port to win the deal in a public auction.
Indira Container Terminal Pvt. Ltd, the special purpose company formed by Gammon and Dragados, had signed a concession agreement with the Mumbai Port in December 2007 to execute the project.
Gammon Infrastructure has a 74% stake in Indira Container Terminal with Dragados holding the balance. The first phase of the new facility with a capacity to load 1.2 million standard containers a year and costing ₹ 1,228 crore was expected to start operations in December 2010.
Gammon Infrastructure has completed the construction of the berth, but is unable to start operations because Mumbai port, as part of its contractual obligations, is yet to complete the dredging work and handover the entire backup area required to store containers.
Gammon is also awaiting security clearance from the government for buying cranes used for loading and unloading containers at the terminal.
The delay, apart from escalating the project cost, has affected the viability of the project because Jawaharlal Nehru Port Trust, India’s busiest container gateway, located a few kilometres away, added capacity with more under construction.
In 2014, Mumbai Port Trust allowed Gammon to handle cars and steel coils at the berth as an interim arrangement till it is able to start commercial operations of the container terminal to help put idling resources to optimal use.
Mumbai port will set 35.064% (the price bid put by Gammon to win the container terminal tender) as the reserve revenue share price for the re-tender.
Price bids below the reserve price set by the government will not be accepted.
“But, the re-tendering process can begin only after Gammon agrees to the base price and other terms", the ministry spokesman added.
Gammon Infrastructure could not be reached for comment immediately.