Operations Gammon

Published on March 8th, 2017

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Gammon’s Failed Container Terminal at Mumbai Port Set for Re-structuring

A failed container terminal built by Gammon Infrastructure Projects Ltd (GIPL) at state-owned Mumbai Port Trust will be re-structured to also handle automobiles and steel as the government looks to revive stalled projects by changing the original cargo profile and help lenders recover money that has turned sticky due to idling facilities and low cargo volumes.

The proposal to re-structure the offshore container terminal (OCT) to handle other clean cargo also was submitted to the shipping ministry a few days ago with the approval of the Board of Trustees of Mumbai Port Trust.

The shipping ministry will forward the re-structuring plan to the cabinet for clearance. Mumbai Port Trust will re-tender the project after securing cabinet approval, a ministry spokesman said.

Mumbai Port Trust finalized the much-delayed re-structuring plan after forging a consensus with the project promoters and lenders.

Mumbai-listed Gammon agreed to scale down the asset replacement value or base price which it had pegged at Rs 1,271 crore, more than double the Rs 549 crore worked out by SBI Capital Markets Ltd, the entity mandated by the Port Trust to carry out this task.

The asset replacement value or base price set at Rs 549 crore is a crucial part of the re-tendering process.

Canara Bank, Punjab National Bank, State Bank of India, Uco Bank and India Infrastructure Finance Co Ltd (IIFCL) had lend Rs 706 crore (now around Rs 900 crore with interest) to the project which has been delayed by more than six years due to reasons over which the project promoters had no control.

GammonA joint venture between Mumbai-listed Gammon Infrastructure and Spanish port operator Dragados SPL S A (in 2010, Dragados was acquired by a group comprising institutional investors from its parent, the Spanish construction conglomerate ACS Group, and re-named as NOATUM Ports S.L.U.) had won the rights in 2007 to develop and operate the new container terminal for 30 years. The consortium agreed to share 35.064 % of its annual revenue with the union government-controlled port to win the deal in a public auction.

Indira Container Terminal Pvt Ltd, the special purpose company formed by Gammon and Dragados, had signed a concession agreement with the Mumbai Port in December 2007 to set up the project.

Gammon Infrastructure has a 74% stake in Indira Container Terminal with Dragados holding the balance. The first phase of the new facility with a capacity to load 1.2 million standard containers a year and costing Rs 1,228 crore was expected to start operations in December 2010.

Gammon Infrastructure completed the construction of the berth, but was unable to start operations because Mumbai port, as part of its contractual obligations, could not complete the dredging work and hand-over the entire back-up area required to store containers.

Gammon also lost time awaiting security clearance from the government for buying cranes used for loading and unloading containers at the terminal.

The delay, apart from escalating the project cost, affected the viability of the project because Jawaharlal Nehru Port Trust (JNPT), India’s busiest container gateway, located a few kilo metres away, added capacity with more under construction.

The OCT was designed only for containers, a Port Trust official said. “But, with the fourth container terminal coming up in JNPT which will double the capacity of that port, we realized that the OCT will not get enough volumes. Hence, we suggested that the project should be allowed to handle roll-on-roll-off ships carrying automobiles and steel”, he said.

In 2014, Mumbai Port Trust allowed Gammon to handle cars and steel coils at the berth as an interim arrangement till it is able to start commercial operations of the container terminal to help put idling resources to optimal use.

Mumbai port will set 35.064% (the price bid put by Gammon to win the container terminal tender in 2007) as the reserve revenue share price for the re-tender.

Price bids below the reserve price set by the government will not be accepted. Gammon will have a so-called right of first refusal on the re-structured project during the tendering process.

If Gammon Infrastructure decides to match the highest revenue share price bid, in case it is not the highest bidder during the re-tendering process, by exercising the right of first refusal, the asset replacement value would be meaningless because the Mumbai-listed firm would be the project operator under revised terms.

But, if Gammon Infrastructure decides not to exercise its right of first refusal to match the highest bid, the new operator of the project will have to pay an upfront amount to Mumbai Port Trust that is equivalent to the asset replacement value or base price agreed by the Mumbai Port Trust and Gammon Infrastructure.

Typically, the replacement value of project assets is used to compensate the project operator for his investment in the project, in the event of termination of contract due to default of the government-owned Port Trust.

But, in this case, the upfront amount (asset replacement vale) to be paid by a new operator will not be given to Gammon Infrastructure because it has defaulted on the loan which has turned sticky. The lenders will invoke their step-in right to claim that amount which will also help the Port Trust hand over the project asset to the new operator without any en-cumberance.

“The upfront amount of Rs 549 crores will not be paid to Gammon because it has defaulted on repaying the loan. We had an understanding with all the five banks. They have agreed to take a hair-cut by waiving off the interest on the loan. The new operator will submit Rs 549 crores into an escrow account and this account will be used to pay off the lenders”, the ministry spokesman said.

“Banks were very much concerned. We had a series of meetings with the chief executives of the five banks in the presence of shipping minister and secretary shipping to sort out the issues. With all this, we have been able to go ahead with the restructuring plan,” an official briefed on the plan said.

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