Vizhinjam – Turning Turtle?

An abrupt change in strategy by the State Government threatens to set the Vizhinjam project back by years if not scuttled for good. It’s urgent that the misconceptions being created around this move be discussed and prompt action be taken to ensure that the project stays its course to fruition.

Right at the beginning let me say that this article is not about the imaginary sea turtles that that resort lobby tried to use as one of many reasons in their attempt to erect an environmental hurdle before the Vizhinjam project. Nor were any turtles or other wildlife hurt during the writing of this post. It’s about the U-turn that the State Government has taken in recent days about the State’s supposed “dream” project and how this move threatens to make the $2 Billion project go belly-up. Hence the allusion to the turtle.

The Landlord Model

As many of us know, in the last three or four years, from the twilight of the LDF Government through nearly the first two years of the UDF Government, the key term used for the Vizhinjam project was the “Landlord model”. In this structure, the State Government acts as the “landlord” of the port by building all the key basic infrastructure including the breakwater, the berths and quays, the backup area as well as road and rail connectivity. The private “operator” brings in the terminal infrastructure, the quay and gantry cranes, and operates the terminal(s).

This model was adopted after the failure of two consecutive pure Public Private Partnership (PPP) bids, in 2005 and 2008. In the pure PPP model, the private concessionaire is expected to finance the entire project, design it, build it and operate it for a specified period, in this case 30 years. This is also called the Design-Finance-Built-Operate-Transfer (DFBOT) model. However, this model is relatively unattractive to a private developer because all the project risk is passed on to it and the entire burden of raising the funding for the project, in this case close to $1 Billion (Rs 5000 Crores) just for Phase I, is placed on its shoulders.

PPP-VGF Model

Even with assured hinterland cargo and existing infrastructure in place, this model has fallen out of favor for port projects. For example, bids for container terminals in India’s two biggest container ports, JNPT (Mumbai) and Chennai as well as it first corporate port, Ennore, have failed multiple times in the past two years. We need to remember that all these ports already have much of the infrastructure – especially the breakwaters and the channel/harbor basin already in place and all three have access to existing cargo traffic (Mumbai and Chennai both have been working well over capacity). Even then, the bids failed. Vizhinjam is completely green-field – all the infrastructure has to be built from scratch. Moreover, it has to capture traffic from other ports, established ones at that, like Colombo, Salalah and Singapore to build up its own market as well as establish links with the hinterland in South India which is currently served by a multitude of ports. There’s no doubt that with its vastly superior draft, location and operating cost advantages, Vizhinjam will build up traffic very rapidly but that will take time and it adds to the risk profile of the project. Secondly, the benefits from core infrastructure projects are often more indirect than direct in nature. The former, including taxes of various kinds, customs duties, indirect employment and disposable income increases and so on, could easily outweigh direct benefits such as the limited employment that the highly automated port itself would generate or cargo revenue it would collect. The Government can tap all these indirect revenues through its broad taxation powers whereas the private developer only has access to the direct port revenues. Forcing the latter to fund the entire project itself will decrease the likelihood of any revenue share coming to the Government. Thirdly, the cost of capital to a private player tends to be more expensive than to a sovereign entity like the Government. Even a couple of percentage points of difference in interest rates would mean a massive sum when we are talking about over $600 Million (Rs 3000 Crores) of debt!

All told, the Landlord model allows the Government to de-risk the project by assuming the responsibility of building the common infrastructure using its cheaper sources of funds (budget support, bonds and debt from public banks). This will help attract the best private operators and will also encourage them to pay a revenue share to the Government once they meet their minimum return on investment target. The Government can recoup the rest of its initial investment from indirect tax revenue from port-related activities. Finally, the Landlord model gives the Government very strong control of the strategic plan and design of the port, whereas in the DFBOT model, almost all control is devolved to the private developer. As has been evident with the “Smart” City imbroglio, where the private developer has been stone-walling the Government for nearly a decade now, giving away all control on a valuable private asset may not always be the best option.

The Landlord model has been and is being used with great success across the world. For example, most of the major ports in the US and Europe are controlled by the respective States or cities. Much of the basic infrastructure has been built by the State and then private terminal operators have been roped in to manage the terminals. Ports like Los Angeles, New York-New Jersey, Houston, Hamburg, Rotterdam, Barcelona and so on are great examples, as are ports in Asia and the middle-East including Singapore. This is not to say that private ports haven’t succeeded in India, some of India’s busiest ports – Mundra, Pipavav and Gangavaram – are private. But these ports have the backing of some of India’s corporate giants and/or have assured captive cargo – mostly bulk cargo like coal, iron ore or crude oil, making them less risky than a greenfield port that focuses on transshipment. Thus, as successful as they are, these are not valid comparisons for Vizhinjam.

The project had been following the Landlord model ever since it was recommended by the project’s strategy advisor, the International Finance Corporation (IFC) and accepted by the State Government in 2010. The first attempt to identify an operator for the port ended in disaster in 2012 after one of the bidders, Adani Ports, was disqualified on security grounds and the lone bidder left, Welspun-Leighton, could not come to an agreement with the Government on the financial terms of the operations contract. The lack of urgency on the part of the UDF Government to expedite the security clearance (it took almost a year) and to negotiate pragmatically with the lone surviving bidder ensured that the bid would fail but even then VISL has proceeded with obtaining the environmental clearance for the project as well as the Engineering-Procurement-Construction (EPC) tender formalities for constructing the Landlord facilities, appointing leading global design and project management firm, AECOM, to create a preliminary master-plan and to manage the EPC tender process. Much of this was detailed in an earlier post, where I summarized how Dr. Shashi Tharoor had effectively intervened to ensure that the port’s master plan had critical design features such as draft, turning circle, breakwater and quay length, and so on to ensure that Vizhinjam has unique advantages from Day One.

Read through here

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