Home / Opinion / Online Views /  Dredging is a perennial problem area for India’s ports

Many of India’s state-run ports are struggling to honour commitments given to private cargo handlers to deepen and maintain channels for ships to dock. It is not something port authorities can control. They have to rely on private dredgers to undertake the work and cannot be faulted if the contractors fail to perform.

The dispute between port authorities and dredging contractors, though, has a bearing on cargo handling projects built by private firms. India’s dredging market is estimated to be worth about 20,000 crore over the next five years.

India’s ports accumulate silt quickly and require dredging throughout the year to maintain navigable depth. Ship sizes are also getting bigger as owners and shippers chase economies of scale so that larger quantities of goods can be transported at a time to save freight costs. This requires deepening the channels and berths to accommodate bigger ships. Dredging ships do this work.

The Indian government has decided to create a minimum depth of 14m at all the 12 ports it owns, where depths range from 9-12m. The global average is 12-23m, enabling the latest generation container, tanker and dry bulk ships to come calling.

New firms have entered the dredging sector, buying cheap Chinese dredgers for their own use to cut costs and rent them out to third parties. They are attracted by the huge potential and also because dredgers are covered under the tonnage tax scheme—a levy based on the cargo-carrying capacity of ships that lowers tax outgo of firms compared with the typical corporate tax.

India’s 12 state-owned ports (except Kolkata port) follow a dredging policy framed in April 2007 that makes it mandatory to award dredging contracts through competitive bidding. In this process, local companies owning dredgers registered in India have a so-called right of first refusal to take up the work if their rate is within 10% of the lowest valid offer of a foreign company.

The contract for maintaining the channel of Kolkata port is given to state-run Dredging Corp. of India Ltd (DCI) on nomination.

A few years ago, dredging work at all the 12 ports were awarded to DCI on a nomination basis. The government also directed these ports to set pre-qualification criteria that were not very stringent so that it did not restrict the entry of certain potential Indian bidders.

Still, local firms that have recently entered the sector find it tough to qualify for large contracts as they are not in a position to meet the eligibility criteria on revenue and prior experience in dredging.

Ports controlled by the Indian government have so far been following the unit rate method for their dredging works wherein the contractor is paid on the basis of the quantity of materials dredged from the seabed measured in terms of cubic metres. The quantity is estimated on the basis of studies done to attain a specified depth.

Ports will never get the desired depth in case of dredging contracts based on the unit rate method. This is because as soon as the contractor dredges the quantity or volume agreed upon, he will stop work and take the money irrespective of whether the depth planned by the port is achieved or not. The port, then, has to hire another contractor to do the balance work, causing delays and incurring extra costs.

These ports are now moving to the assured depth method for undertaking dredging works.

In the assured depth method, the dredging contractor is paid only after he reaches the depth specified in the contract, irrespective of the quantity or volume dredged. Under this method, the risk involved in undertaking the work is totally transferred to the contractor. The assured depth method may hike the budget for deepening and maintaining port channels because when the contractor’s risk increases, he will factor it in his pricing. But, at least, it will ensure that the port gets the desired depth on time without any trouble.

The new model will also help ports finalize a dredging budget without the need to go for cost revisions, something that was common under the unit rate method.

However, critics of the new method have asked the government to scrap it arguing that it will not work in cases where the material to be dredged are heterogeneous in nature.

Private ports are better placed compared with state-owned ports in the matter of dredging. The government’s dredging policy is not applicable to them. Many of these private port operators have their own dredging fleet and can accomplish the work much faster.

The fleet of DCI, India’s biggest dredging contractor, mostly comprises dredgers that are capable of maintaining port channels at their current depth and not for deepening them. As a result, India’s ports depend on Dutch and Belgian contractors for their requirements.

India’s shipping ministry has now advised state-run ports that have lined up channel-deepening plans to explore the possibility of setting up joint ventures with Shipping Corp. of India Ltd (SCI) and DCI, both state-owned, to purchase and operate dredgers for their captive needs.

This, according to the ministry, will be mutually beneficial as ports will be able to get dredging done quickly while SCI and DCI will get assured business.

P. Manoj looks at trends in the shipping industry.

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