Home >Opinion >Revelations by auditor puts first trans-shipment terminal in the dock
The Comptroller and Auditor General (CAG) has made a revelation in a report submitted to Parliament last week that the Cochin Port Trust, the Union government-owned entity which implemented the facility on a public-private-partnership (PPP) model, actually, forced international container trans-shipment terminal on DP World, by diluting a key tender clause for its construction.
The Comptroller and Auditor General (CAG) has made a revelation in a report submitted to Parliament last week that the Cochin Port Trust, the Union government-owned entity which implemented the facility on a public-private-partnership (PPP) model, actually, forced international container trans-shipment terminal on DP World, by diluting a key tender clause for its construction.

Revelations by auditor puts first trans-shipment terminal in the dock

Five years into its operations, the international container trans-shipment terminal at Vallarpadam in Cochin port has hardly changed the game for India

It’s a project that continues to baffle port industry experts. India’s first attempt to build an international container trans-shipment terminal (ICTT) of its own at Vallarpadam in Cochin port to ship container cargo directly without routing it through neighbouring hub ports such as Colombo and Singapore and thus save time and costs for exporters and importers, was hailed as a game-changer.

But, five years into its operations, the facility has hardly changed the game for India. DP World Ltd, the Dubai-based port operator, and the Indian government together invested more than 3,000 crore to set up the ICTT. The government even relaxed a key shipping law to allow foreign-registered container ships to ply on local routes connecting Vallarpadam ICTT to help it reach full potential. Cochin Port Trust also cut vessel-related charges (fees for ships calling at the facility) by 85%. Still, India sends and receives about 2 million twenty-foot equivalent units (TEUs) every year via Colombo. ICTT is operating at just 35% of capacity of 1 million TEUs a year. In fact, of the 367,000 TEUs handled by the ICTT in the year to March, only 17,000 TEUs were trans-shipment containers (directly shipped to destinations).

The Comptroller and Auditor General (CAG) has now made a revelation in a report submitted to Parliament last week. Cochin Port Trust, the Union government-owned entity which implemented the facility on a public-private-partnership (PPP) model, actually, forced ICTT on DP World, by diluting a key tender clause for its construction.

DP World won the rights to build the ICTT in a public auction in 2004 which mandated that the Dubai government-controlled firm had to first take over and operate the existing facility named Rajiv Gandhi Container Terminal (RGCT) at Cochin port and start constructing the ICTT only when the traffic (volume) at RGCT touched 400,000 TEUs a year.

If this limit was not attained within six years of award of the project, DP World was not contractually obliged to construct the ICTT and RGCT was to be reverted to Cochin Port Trust after eight-and-a-half years. “Subsequently, Cochin Port Trust realized the bidder (DP World) might operate the terminal for eight-and-a-half years without exceeding the 400,000 TEU limit and, thereby, evade the contractual obligation of constructing the ICTT and requested DP World for an early migration from RGCT to ICTT without linking it to the achievement of traffic at RGCT," the CAG wrote in a report on PPP projects at major ports (those owned by the Union government).

In return for this deviation from the tender conditions, Cochin Port Trust offered concessions in the tender terms on a request from DP World, which translated into a financial implication of 40.23 crore, according to CAG.

“The fact that Cochin Port Trust was compelled to extend post-tender concessions to the bidder to ensure early migration to ICTT confirms the sharing of risk and incentives were uneven between the port and the PPP partner initially. Even after migration to ICTT, the additional expected benefits (arising) out of the post-bid concessions could not be achieved as the terminal operated at 35% capacity. Such post-tender concessions vitiate the sanctity of the tendering process," the government auditor wrote in the report.

The Cochin Port Trust management, according to CAG, defended its decision stating that “the possibility of getting a better offer if formalities were undertaken once again was duly considered by the board of trustees while recommending the proposal to the government".

“The shipping ministry said the award of the project with the concessions under the circumstances was a conscious decision taken by the government to prevent the concessionaire (DP World) from evading contractual agreement of migration to ICTT by not exceeding the traffic limit of 400,000 TEUs at RGCT and thus subverting the entire process from structuring to award of the project," CAG wrote. The ministry also said the reasons for the project running at lower capacity were “extraneous".

In its last year of operations at RGCT, DP World handled 315,000 TEUs, which has crawled to 367,000 at ICTT in the year ended March after a full four years of operations.

Curiously, unlike cargo contracts at other state-owned ports, the ICTT deal does not have minimum guaranteed volume written into the agreement.

To be sure, DP World faced headwinds from one of the worst recessions since starting operations at ICTT in 2011. But, it is also clear the ICTT has not made any significant impact on the 2 million TEUs India’s exporters and importers sent via Colombo, before the ICTT came up and after.

India’s shipping ministry has not decided on extending the cabotage relaxation given to ICTT for a further period. It is also weighing a plan to convert the ICTT into a normal gateway facility. The latter could further complicate an already vitiated tendering process marked by dilution of terms and post-bid concessions.

With the ministry taking the stand that any change in contract terms of a running project would necessitate a re-bid, it would be worthwhile to look at this option for ICTT, with DP World getting the right of first refusal.

P. Manoj looks at trends in the shipping industry.

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