Cochin Port flouted own tender terms, gave sops to thrust ICTT on DP World: CAG
5 min read 20 Dec 2015, 11:44 PM ISTIn lieu of the deviation from the tender conditions, Cochin Port Trust offered concessions from the tender terms on a request from DP World
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Bengaluru: Union government-owned Cochin Port Trust in Kerala forced the international container transshipment terminal (ICTT) at Vallarpadam on DP World Ltd, a Dubai-based company, by overlooking or ignoring a key contract clause and even offering it post-bid concessions, according to the Comptroller and Auditor General.
The government auditor made these disclosures in a report submitted to Parliament on Friday, revealing a strange case of a state-owned port flouting its own tender terms to suit its convenience.
The disclosures come at a time when India’s policy planners continue to look for explanations for the below-par performance of ICTT, which was designed save exporters and importers time and money by cutting India’s dependence on neighbouring hub ports such as Colombo and Singapore.
About 2 million twenty-foot equivalent units or TEUs (the standard size of a cargo container) originating in and destined for India is transshipped at Sri Lanka’s Colombo port every year.
The ICTT, built with an investment of about ₹ 3,200 crore—shared between the government and the private firm DP World—was opened in February 2011.
A container transshipment terminal such as the one at Vallarpadam acts like a hub, into which smaller feeder vessels bring cargo which 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. This translates into lower freight rates for exporters and importers.
Due to depth restrictions, bigger container ships cannot call at many of India’s ports.
DP World Ltd, the world’s fourth biggest container port operator, which is majority owned by the Dubai government, won a 30-year contract to build and operate the ICTT in a public auction in 2004 by placing the highest revenue share price bid of 33.30%. Ports contracts at Union government-owned ports are decided on the basis of revenue share—the entity willing to share the most from its annual revenue bags the deal. This was the third attempt by Cochin Port Trust to develop the project after two previous auctions failed to attract a private investor.
According to the terms of a 2004 tender for the project, the successful bidder had to 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 (volumes) at RGCT touched 400,000 TEUs a year. If this limit was not attained within six years of award of the project, the bidder was not contractually obliged to build the ICTT and RGCT was to be reverted to Cochin Port Trust after 8.5 years.
“Subsequently, Cochin Port Trust realized that the bidder might operate the terminal for 8.5 years without exceeding the 4 lakh TEUs limit and thereby evade the contractual obligation of constructing the ICTT and requested DP World for early migration from RGCT to ICTT without linking it to the achievement of traffic at RGCT," the CAG wrote in a report on public-private-partnership (PPP) projects in major ports (those owned by the Union government).
In lieu of this deviation from the tender conditions, Cochin Port Trust offered concessions from the tender terms on a request from DP World, which translated into a financial implication of ₹ 40.23 crore, according to the CAG.
The concessions included payment of a contractually mandated upfront fee in instalments spread over eight years; reduction in the upfront payment to compensate for the short period use of existing equipment at RGCT; deferment of 25% of the royalty payable to the port for eight years; relaxation in licence fee for Q-7 berth and relaxation of height restriction at RGCT for operation of cranes.
“The fact that Cochin Port Trust was compelled to extend post-tender concessions to the bidder to ensure early migration to ICTT confirms that 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 tendering process," the government auditor wrote in the report.
In the year ended March 2015, the ICTT Vallarpadam handled 365,000 TEUs of which the transshipment export-import (EXIM) containers (those shipped directly without routing through neighbouring hub ports) were only 17,000 TEUs. The facility has a capacity to load 1 million TEUs a year.
The Cochin Port Trust management, according to the 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 management further stated that the concession of ₹ 40.23 crore was only 0.5% of the net present value (NPV) of entire revenue from the project".
“The shipping ministry stated that 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 the contractual agreement of migration to ICTT by not exceeding the traffic limit of 4 lakh TEUs at RGCT and thus subverting the entire process from structuring to award of the project," the CAG wrote. The ministry also said that the reasons for the project running at lower capacity were “extraneous".
DP World was not immediately available for comment.
To make the ICTT realize its full potential, Cochin Port Trust cut its so-called vessel related charges (the fees paid by shipping lines calling at the facility) to help the ICTT compete with Colombo.
In September 2012, the Union government also relaxed a so-called cabotage rule for three years to allow foreign registered container vessels to ship export-import (EXIM) containers out or in through the ICTT and help it emerge as an international transshipment hub. The relaxation is yet to be renewed after it ended in September this year.
The ICTT operates from a special economic zone (SEZ) that grants fiscal concessions and procedural ease at par with competing global terminals.
But, all these have not made any impact on the ICTT.
The revenue share that Cochin Port Trust earns from the ICTT is “not even sufficient to recover the money spent by the Port Trust every year to maintain the water depth in the channel leading to the terminal", a shipping ministry spokesman said.
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