Mumbai: The Congress-led United Democratic Front government in Kerala on Monday handed over a letter of intent to Adani Ports and Special Economic Zone Ltd (APSEZ), indicating its intention to appoint the company to develop a new port at Vizhinjam in the southern part of the state.

“We have handed over the letter of intent to Adani Group today. It’s a clean project. There is no controversy in it," Kerala chief minister Oommen Chandy said in a phone interview.

A final agreement will be signed in 45 days, according to Kerala government officials.

The decision by the Congress-led government in Kerala to approve the bid submitted by APSEZ to develop the Vizhinjam port may help the Bharatiya Janata Party (BJP)-led government at the centre repel the opposition’s attack over the Adani Group’s alleged proximity to Prime Minister Narendra Modi.

The Adani Group, owned by billionaire Gautam Adani, and the BJP have denied allegations that the group’s Mundra port in Gujarat flourished because of favours granted to it during the years Modi was chief minister of the state.

“There was no controversy. The confusion created over Vizhinjam is a product of media," Chandy said. “We were anxious about the tender as Adani Group was the sole bidder. But that is over," he added.

An order asking the Adani Group to start work on the project was to be issued on Monday. The group is expected to reply within seven days of receiving the order. Adani Group representatives are expected to reach the state on 20 July.

The Adani Group declined to comment.

The outlook for cargo growth to remains strong over the medium to long term on the back of domestic coal requirements for the power sector, crude oil and other cargo, according to rating firm Icra Ltd in its latest research update, released on Monday.

As per Icra’s estimates, in fiscal 2015, total cargo handled at Indian ports registered a modest increase of 5.4% to 1.043 billion tonnes from 976 million tonnes a year earlier. The growth was pegged down by a relatively weaker cargo performance at the major ports, which registered a modest growth of 4.7% in cargo volumes to 581 million tonnes in fiscal 2015. Non-major ports, on the other hand, are likely to have pushed up the overall growth rate by recording a 10% growth in throughput on a year-on-year basis to 462 million tonnes in fiscal 2015, Icra said.

“From a location perspective, Vizhinjam is a great location for a deep-water port. Around half a kilometre from the shoreline, there is a 20m natural deep draft which reduces both the capital and maintenance dredging costs for vessels," said Sameer Bhatia, president, Crisil Infrastructure Advisory, a unit of Crisil Ltd. In addition, the port is located exactly (with minimal deviation) on the main East-West shipping route, he said. Bhatia has done extensive studies on the Vizhinjam port.

The greenfield port, being planned around land reclamation, will also avoid the likely hurdles if large land parcels were to be acquired in the vicinity, Bhatia noted.

Shashi Tharoor, the Congress party’s Lok Sabha member from Thiruvananthapuram, on 8 July posted on Facebook that the Vizhinjam project has been pending for the last 25 years, and that this is the fourth round of bidding for the project, which has the potential to transform the fortunes of Kerala.

“Three bids have failed in the last 25 years, and it is a fact that Vizhinjam is a very difficult project and very few have the experience or ability to make it a success and realize its immense potential," Tharoor wrote.

What are the challenges for the project?

“The most critical factor for making Vizhinjam a large regional transhipment port will be to convince the shipping lines to schedule regular calls at the port. However, one is faced with a dilemma here—cargo will come to the port if the shipping lines call, but the shipping lines will call only if they are assured of cargo!" said Crisil’s Bhatia.

The Vizhinjam port is being developed as a container trans-shipment port to compete with the Colombo port of Sri Lanka.

It has sufficient water depth for the purpose and its proximity to the main shipping lane is better than or similar to Colombo, which is currently the biggest trans-shipment facility in the region.

Colombo and Vizhinjam are located in close proximity to the international shipping route involving only a marginal diversion of about 20-25 nautical miles. While Colombo has a water depth of 16-18m, Vizhinjam will have much deeper berths and an approach channel of up to 20m, capable of docking mega-container ships.

A container trans-shipment terminal acts like a hub, into which smaller feeder vessels bring cargo, which then gets loaded on to larger ships. Larger vessels bring about economies of scale and reduce the cost of operations for shipping lines, which then translates into lower freight rates for exporters and importers.

About 2 million twenty-foot equivalent units (TEUs, the standard size of a cargo container) originating in and destined for India get trans-shipped at Colombo every year. India has created and is looking to build more facilities that can help trans-ship containers from the country itself.

To be sure, most Indian container ports now offer very efficient direct services to export-import cargo.

“About 1 million TEUs of Indian cargo still gets transhipped at Colombo, but this is essentially from the Southern India ports like Tuticorin, Chennai and Kochi. Vizhinjam port authorities will have to ensure that the cargo from the primary and secondary hinterland has easy and cost-effective access by land to the port. Kerala, in general, has had challenges in ensuring free and easy movement of cargo into the state, which has also impacted logistics costs," Bhatia warned.

Another important competing factor for Vizhinjam port will be efficient operations, Bhatia said.

“It will not only have to compete with the best Indian ports, but offer quicker turnaround time to mainline vessels as compared to Colombo port. In addition, it will need to ensure very competitive terminal handling charges," he added.

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