Operations

Published on April 11th, 2017

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D P World’s Vallarpadam ICTT Suffers Profile ‘Mis-Match’

Global Port operator D P World-run international container transshipment terminal (ICTT) at Vallarpadam in Cochin Port handled 4.91 lakh twenty foot equivalents units (TEUs) in the year ended 31 March 2017, the highest since starting operations in 2011, but behind the impressive performance lurks some bitter truths on the profile of India’s first such facility that was designed to cut the nation’s dependence on neighboring Colombo port to send and receive container cargo.

India Gateway Terminal Pvt Ltd (IGTPL), the entity that runs the ICTT, clocked a scorching growth rate of 17 per cent, closing the year at 4.91 lakh TEUs from 4.16 lakh TEUs in 2015-16. The growth in container volumes is all the more creditable when compared with single digit growths at most of the container handling terminals operating at union government owned ports given the difficult global trade scenario.

At 4.91 lakh TEUs, D P World has reached close to half of the IGTPL’s capacity of One million TEUs.

But, of the total volumes handled at ICTT, the transshipment volumes are still in the range of a paltry 7-8 per cent. This is where it pinches the government’s policy makers. “The ICTT is mostly concentrating or actually functioning as a gateway terminal,” says a shipping ministry official.

The ICTT, built with an investment of about Rs 3,200 crore, shared by the government and the private firm, was opened in February 2011.

A container transshipment terminal such as the one developed 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, which then translates into lower freight rates for exporters and importers.

Due to depth restrictions, bigger container ships cannot call at many of India’s ports.

Vallarpadam was designed to cut India’s dependence on neighboring hub ports such as Colombo in Sri Lanka, Singapore, Salalah and Jebel Ali in Dubai, Tanjung Pelepas and Port Klang in Malaysia to send and receive container cargo, thus saving time and cost for exporters and importers.

About 2 million standard containers originating in and destined for India gets transshipped at Sri Lanka’s Colombo port every year.

A gateway terminal, on the other hand, is a facility that handles export-import containers directly or origin/destination containers.

D P World Ltd, the world’s fourth biggest container port operator majority owned by the Dubai government, won the 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 per cent. 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 gets 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.

Strangely, the ICTT does not have a minimum-volumes (Minimum Guaranteed Throughput) written into the contract nor is it required to handle a specific level of container transshipment volumes to conform to its status. In short, it is an open-ended contract considering that all private cargo handling contracts at major ports typically have a MGT which the operator has to comply with.

“We can’t imagine such a thing now,” says a government official. “But, at that time, keeping in mind various factors such as the need for a container transshipment terminal in India and the two failed global tenders to develop the facility, when D P World offered 33.30 per cent revenue share, the government went out of its way to accommodate the Dubai firm,” he said.

The second highest revenue share price bid in the tender was some 10 per cent.

No MGT is not the only sop that the government offered to ICTT.

After starting operations, D P World realized that the success of the transshipment terminal would depend on getting relaxation from a key local shipping rule.

India’s coastal trade (shipping cargo between different local ports) is reserved for ships registered in India and foreign ships can be hired only when Indian ships are not available after taking permission from the country’s maritime regulator, according to the so-called cabotage law.

This restriction was one of the main factors that discouraged mainline foreign vessels from calling at Vallarpadam ICTT.

On 6 September 2012, the union cabinet agreed to ease cabotage policy by allowing foreign registered vessels to ship export-import (EXIM) containers out or in through the ICTT and help it emerge as an international transshipment hub.

The primary objective of relaxation in cabotage policy is for ICTT to attract cargo destined for Indian ports which are presently being transshipped at Colombo and other foreign ports. This initiative is expected to promote transshipment of Indian cargo from ICTT and reduce dependence on nearby foreign ports, a government statement said after the cabinet cleared the relaxation.

The relaxation in cabotage policy will be subject to review after three years, the cabinet agreed.

The status of the cabotage relaxation for ICTT is still not clear even after the shipping ministry undertook a review post the three-year timeframe that ended in September 2015 to re-examine and decide whether to continue with the relaxation or not.

“That relaxation in cabotage law was given to ICTT alone as a special case. It was specific to ICTT. But, subsequently, in March 2016, the shipping ministry unveiled a new cabotage relaxation policy. But, what ICTT is saying is that it is not specific to ICTT but a general order whereas the relaxation granted by the cabinet in 2012 was specific to ICTT”, says the official.

“After review, if the government wanted to revoke the cabotage relaxation granted to ICTT, it has to issue an order. But, the government has not issued such an order after September 2015. Even after a review, the ministry has not issued an order saying whether they are continuing or revoking. So, by default, it is continuing. Relaxation is valid today because it was a specific order which has not been revoked,” the government official said.

Since, there is no difference in the separate order relaxing cabotage for ICTT in 2012, there is nothing which indicate that there is no relaxation for ICTT.

“But, there is a confusion in the market because of the cabotage policy of March 2016,” says sources.

Irrespective of this, there is hardly any beneficial impact on transshipment volumes at ICTT, which is hovering in the range of 7-8 per cent a year. Transshipment is currently done through feedering on foreign ships.

“For namesake, there is cabotage relaxation. But lines cannot do long-term planning because of lack of clarity. Transshipment services are typically done for 4-5 years, not for one year or six months. If you don’t leave the time duration open while granting cabotage relaxation, lines cannot plan long-term,” said an executive with a European container shipping firm.

“If you want to promote transshipment in a big way and increase the quantum of transshipment volumes, clarity is needed on cabotage relaxation,” he added.

That aside, Cochin Port Trust has granted huge rebate in vessel related charges (VRC) to container ships calling at ICTT to promote the facility.

These include an 85 per cent rebate in VRC to the four mainline services calling at ICTT, a 50 per cent rebate in VRC to container shipping services other than mainline services to foreign destinations, not confined to Colombo, and not connecting Cochin and Colombo, either directly or via Tuticorin.

Further, a 30 per cent rebate is given to container vessel services other than mainline services between Cochin and the Middle East.

“The rebates granted in VRC amounted to more than 50 per cent of the notified tariff, resulting in Cochin Port Trust earning a net VRC income that is less than the quantum of rebates granted, all this for being competitive with respect to the ports in the region to promote ICTT,” Cochin Port Trust said in a submission to TAMP, the rate regulator.

Experts say that Vallarpadam was a wrong choice to locate a transshipment terminal, at least in terms of depth and year-round dredging to keep the channel navigable. Deep draft is one of the key requirements for a transshipment terminal to facilitate bigger container ships to dock.

“Someone should have done research that in course of time, it requires a minimum draft of 15-16 metres,” a Mumbai-based port consultant said. Vallarpadam currently has a depth of 14.5 metres.

Cochin is also prone to siltation and requires dredging to make the channel navigable for ships throughout the year, entailing huge costs. Dredging costs are typically priced into the vessel related charges (port dues, berth hire and pilotage) that ships pay to call at a port. The port calling costs at Colombo is one-tenth of Vallarpadam. This makes competing with Colombo an extremely difficult task. Colombo can give that level of port costs because it is a volumes game. Colombo gets more ship calls in a week by offering much lower port costs. More ship calls mean more money.

The money spent by Cochin Port Trust on maintain the shipping channel and the revenue foregone due to rebates in VRC “have so far been without any meaningful returns with such low volumes at ICTT”, says Cochin Port Trust.

Cochin Port Trust says that IGTPL is unable to ramp-up volumes because of the exorbitant terminal handling charges (THC) it levies from customers.

“Cochin Port Trust is of the view that volumes at ICTT can grow only if competitive tariffs are ensured. Promoting regional and hinterland cargo through competitive tariff is a prerequisite for attracting transshipment cargo,” it said in a submission to TAMP.

IGTPL has countered that view saying “it is offering very competitive rates, better than any other competing terminals in the near vicinity as far as container related charges are concerned”.

Despite all this, Vallarpadam almost never happened.

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 4 lakh TEUs a year. If this limit was not attained within six years of award of the project, the bidder was not contractually obliged to construct the ICTT and RGCT had 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 D P World for early migration from RGCT to ICTT without linking it to the achievement of traffic at RGCT,” India’s government auditor, the Comptroller and Auditor General or CAG, disclosed in a report submitted to Parliament.

In lieu of this deviation from the tender conditions, Cochin Port Trust offered concessions from the tender terms on a request from D P World, which translated into a financial implication of Rs 40.23 crore, according to the CAG.

The concessions included payment of (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 per cent of the royalty payable to the port for eight years; relaxation in license fee for Q-7 berth; 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 per cent capacity. Such post tender concessions vitiate the sanctity of tendering process,” the government auditor wrote in the report.

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 Rs 40.23 crore was only 0.5 per cent 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 (D P 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”.

“Though, Vallarpadam was conceived as an ICTT, it is a different matter that it is not an ICTT anymore given the very low transshipment volumes it handles,” says the government official.

The question now is why were huge sops given for building India’s ‘first container transshipment terminal’ only to end up playing the role of a ‘gateway’ with no prospects ever of becoming the facility it was originally intended to be.

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