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).
The Landlord model of Port Development
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 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.
The U-turn
Having
stayed the course so long, it was surprising that in the last few weeks, with
just days left till the Environmental Impact Assessment (EIA) report is
received and when the EPC tender is getting ready to go out, numerous media
reports started pointing to an abrupt U-turn by the Government on the project’s
development model.
It
appears that the powers-that-be, a combination of the bureaucracy and their
political mentors, now want to shrug off the responsibility of funding and
developing the project and pass the Billion-dollar buck back to the private
sector, knowing full well that this model is unlikely, if not impossible, to
succeed. The stated reason for this change of mind is that the State now wishes to seek Viability Grant Funding (VGF) from the Center to meet part of the cost
of the project.
VGF
is a development support mechanism instituted by the Government of India to
provide partial financial aid to major infrastructure projects such as ports,
roads, airports and so on where the inability of the project developer,
especially a private one, to capture all indirect revenues together with the
need to maintain user fees (ticket rates, cargo charges etc) to a level that is
both market compatible (which users will want to pay) and socially just (where
everyone can afford the fees) makes the project unviable without some
additional funding. Essentially, we can explain VGF via the following simple
equation (ignoring most of the finance behind it such as discounting, present
value and so on):
Total Cost of Project – Revenues that the
Private Developer can recover at market supported rates = VGF
Actually,
VGF is capped at 20% of the total cost (minus any land component costs),
irrespective of whether that would be enough to make the project viable. The
reasoning is that if even a 20% grant cannot make a project viable, it’s better
not to do it. Once VGF is sought, the State Government’s investment is also
capped at 20%, which throws the Landlord model (where the State has to invest
between 60-75%) out the window with all its advantages, as we reviewed above.
Finally, VGF caps the tariff a project can charge so that the developer doesn’t
get the aid and then charge users to make a very tidy profit. However, this
restricts the developer’s commercial flexibility and can further hurt the
attractiveness of the project at a time when most of the private operators in
India’s public ports are suffering in the shackles imposed by tariffs fixed by
the dreaded Tariff Authority for Major Ports (TAMP).
One
wonders why the Government that was making excited noises (albeit all noise and
little action!) about the port project till recently and has touted the
supposed budget allocations that they are making for it, suddenly makes a
U-turn. Personally, I have three or four reasons that could be behind this
U-turn.
First
and foremost, some bright soul at the Finance Ministry might have realized the
awful truth that the Government doesn’t have anywhere near enough funds for all
the projects that it and its predecessor have announced. Add up Vizhinjam (Rs 5,000
Crores), the Trivandrum MRTS (Rs 4,500 Crores), Kozhikode MRTS (Rs 2,000
Crores), Ernakulam MRTS (Rs 5,000 Crores) and Kannur Airport (Rs 1,500 Crores),
and the State is looking at investments worth a total of Rs 20,000 Crores in
the next three years, of which the State will have to bear anywhere from 20% to
50%, depending on the project. This means that the Government’s outflow could
be between Rs 5,000 to Rs 10,000 Crores in the next 2-3 years. That’s Rs 5,000 -10,000 Crores that it
doesn’t have to spare. More than 60% of the annual budget, which this year has
been fixed at Rs 17,000 Crores goes just to pay salaries and employee benefits.
Unless the Finance Minister has a wizard’s hat packed away somewhere, it’s
painfully evident that there’s not enough money to go around. Today, Vizhinjam
and the Kannur Airport are leading the race to break ground. Vizhinjam will be
able to enter construction in late-2013 if everything goes according to plan.
Now, here’s where things get positively sneaky. The Kerala Government is
planning to introduce a common fund for infrastructure projects from which
projects that are making progress will be funded at the cost of projects that
are not. As of now, this means Vizhinjam will have to be funded before projects
that are much closer to the Government’s heart, as evidenced by the Chief
Minister and half the Cabinet camping out once a month in Delhi to get special
exceptions or doles for it. If you are still confused, I am talking about the
Ernakulam Metro project that has been anointed the “Dream Project” of the
State, despite the plain fact that it only benefits one city. The project has
not secured any funding beyond the 30-40% that the State and Central
Governments have agreed to come up with. There’s the strong potential that the
State will have to come up with a lot more if a lender like the Japanese International
Cooperation Agency (JICA) doesn’t agree to sanction the entire amount. So, we
could be forgiven for thinking that someone in the corridors of power wants
Vizhinjam off the funding list to make way for projects that are held far dearer.
Next
of course, one might imagine that there’s a certain reticence on the part of
senior public officials, both elected and selected to be associated with what
is perhaps the single biggest civil engineering contract to be handed out in
Kerala’s history, at nearly Rs 3,500 Crores – the EPC contract to build the
breakwaters, quays, terminal area and road-rail connectivity. And what could
also become the single biggest vigilance investigation some day, considering
the turn of events for many an engineering contract, big and small, awarded in the last 60 or so years. The
prevalent practice seems to be to pass the buck to someone else, such as the
Delhi Metro Rail Corporation (increasingly all roads lead to E. Sreedharan’s
wife house in Ponnani!). Thereafter any
pointed fingers can be redirected to the said agency, for which the latter is
compensated generously, in the case of DMRC with a nice, fat, 3.5% fee, that adds up to
over Rs 200 Crores for the Ernakulam project alone. Well, it’s the public’s
money, why should the powers-that-be worry about wasting a few hundred Crores
when they can buy themselves protection. This could be another strong reason
for trying to pass Vizhinjam off to the Central Government. And fearful of
incurring the wrath of the opposition which was in Government when the Landlord
model was adopted, a convenient smoke screen in the form of the PlanningCommission was invented by inviting a senior advisor to the Commission to visit
Kerala and deliver a discourse on the virtues of PPP and VGF. A discourse that
conveniently omitted key points such as that of the nearly 120 projects awarded
VGF till date, there is not even a single port-based project. Or that the Union
Government has not ever undertaken a green-field PPP port project till date.
Curiously, of the many projects about which the State Government waxes eloquent
at frequent intervals, only the Vizhinjam port and the Trivandrum MRTS were
found suitable for PPP. Does that mean that the Government does not believe
that projects like the Ernakulam MRTS, the Kannur Airport and the Kozhikode
MRTS are not viable in the very least such that they have to be completely
funded from the State exchequer? Why this sudden special dispensation for
projects in Trivandrum? Well, we didn’t ask for any such thing and can we have
our tax Rupees invested back in our projects please?!
Then
of course, there are the even more directly nefarious elements out there,
standing with the usual suspects – Vizhinjam’s competitors. Ports ranging from
major transshipment hubs like Colombo and Salalah, which depend on Indian
transshipment for survival, to minor ones like Ernakulam, whose hinterland
would be encroached upon by the much more cost effective Vizhinjam just 200 Km
to its South. It’s hard to believe that some sort of vested interests are not
at work when a trumped up shell company called Zoom Developers twice scuttled
the bidding process for Vizhinjam. The same company went belly up and vanished
from sight in 2011, leaving in its trail one of India's biggest banking scams and a number of much hyped projects that
were never begun, including a ludicrous but much trumpeted proposal to build a 100 floor high tower in Kalamassery near Ernakulam for which the State
Government even allotted land! And when the same individual that played a majorpart with Zoom when they scuttled Lanco’s bid through endless and frivolous litigation,
surfaced again to “advise” Welspun-Leighton in 2012, one cannot help me
suspicious. Going from invisible lobbies to very visible ones, we have seen how
much havoc the so-called “resort lobby”, a small but determined and very
influential group of resort owners in the port project area, have caused in the
recent months. Not only has the Government shown no gumption to challenge these
individuals, it’s common knowledge that the leader of this alliance is a close relative of one of the most influential powers that be in the current
Government. Little surprise that the project is making little headway.
Isolated Responses
The
facts stated above were not gleaned by sophisticated spy satellites or Walther
PPK-toting, suede spies, but are widely available in the public domain as
highlighted by the links that I have provided, which represent but a fraction
of the material out there. Assuming that our elected representatives still read
the local newspapers (forget the national and international media or media of
any electronic kind), it is indeed mysterious and appalling that, save one, no
elected representative from the district (yes, let’s forget than nice
Pan-Kerala myth for the moment) has made the chronic lack of progress of the
project or this latest U-turn a prime focus of their legislative or civic
activities. We count 2 MPs, 10 or so MLAs, 1 State Minister and the Speaker of
the Assembly, among the gentlemen and ladies that we cast votes for (not to
mention assorted “firebrand” leaders of the CPM and Congress). And save for Dr.
Shashi Tharoor, has anyone seen these worthies picketing the Secretariat or
sitting outside the CM’s office demanding progress with the project? I
sometimes wonder that they seriously believe that inaugurating those swanky new
automatic toilets is more important than raising their voice for the single
most important infrastructure project in Trivandrum and Kerala. Or
perhaps the facts of the matter simply fly over their collective head, if this
be the case, we should wish that they resign and make way for a similar number
of randomly chosen 7th Standard kids. That’s the intellectual
caliber that is demanded here, not that of Albert Einstein!
Either
way, only Dr. Tharoor has raised the matter at the highest levels, among our
worthy elected representatives. And beyond that, only former Ports Minister and
senior CPM leader, Mr. M. Vijayakumar has come out openly against the sorry
status that this project has been cast into. The latter has been committed to
this project for decades now and it was during his tenure as Ports Minister,
that the project made truly significant strides and the present Landlord model
was evolved. However, unfortunately, he is no longer the Ports Minister and he
can only argue, not mandate, at this time.
This leaves Dr. Tharoor as the only
hope in terms of having both the interest and the ability to salvage it.
Soon
after the Government stated to leak its intention to switch models at
Vizhinjam, Dr. Tharoor intervened with the CM and the Ports Minister and asked
that a special Director Board Meeting of VISL, on which all of them serve, be
called to discuss the matter which was at the time being clandestinely routed
via various sub-committees under the radar of the Board. It’s understood that
he very forcefully made the case for the project to continue on its current
path, and move to the EPC tender stage before the end of 2013.
Dr. Tharoor
objectively rebutted the claims of the proponents of the PPP/VGF idea with
facts and figures, forcing the CM and Ports Minister, who were present, to put
the brakes on the surreptitious moves to ship the project out to the Center and
instead referred it to an “Empowered” Committee of Secretaries to examine Dr.
Tharoor’s submission and to see if there was any merit to seeking VGF at all.
Dr. Tharoor further questioned why the Government had not further pursued the
Government-to-Government (G2G) model that he had proposed long ago to explore
the possibility of tying up with a capable State-owned/backed port operator
like Barcelona, Singapore, Rotterdam, Hamburg or Antwerp and insisted that any
Central aid should be in the form of no-strings attached funding for the road
and rail connectivity for the project, which could be executed by the National
Highway Authority and Indian Railways respectively. This would cost about Rs
500-600 Crores (the same as the proposed VGF), similar to how nearly Rs 2000
Crores was spent on the rail-road connectivity for the Vallarpadam container
terminal in Ernakulam.
One
thing is sure, that at least Dr. Tharoor and Mr. Vijayakumar have stood up and
argued for the project has put the Government on notice that they cannot get
away with tweaking the project’s model in secrecy. Despite the abject lack of
coverage in the local media, which still devotes pages and pages to the
so-called “Smart” City project that has not seen the light of day after 8 years
of “development”, this issue has come out in the open now and I hope that this
post will at least make a few more of you aware as to how a project that can change
the very face of our State and all our lives is at risk of a quiet, secret
burial at sea. And unlike in the case of Bin-Laden, this funeral is being
arranged by those who are supposed to be protectors not executioners of the
project!
A
very recent footnote is the hue and cry raised by none other than the honorable Finance Minister that the Union Budget has not put aside a single Rupee for
Vizhinjam when it allocated Rs 7,500 Crore for expansion of the nearby
Tuticorin Port and also announced plans to establish two new ports in West
Bengal and Andhra Pradesh. All the tears being shed for “poor” Vizhinjam are
likely crocodilian in nature because of a few simple reasons. First, Vizhinjam
is a so-called State/minor port, it is outside the purview of the Central
Government. No formal proposal has been made to the Center for assistance and
as discussed above, it’s best that no request for VGF be made. Those calling
for the handover of the project to the Center forget (or fully intend to take
advantage of) the fact that most projects taken up the Central Government take
years if not decades to even get off the drawing board, forget actual
construction. The Tuticorin outer harbor project, for which funding was just
announced (actual construction might be several years away, if at all) was
first planned in 2006. The port in West Bengal, at Sagar, has been doing the
rounds for a decade now and even now, no actual project plan or funding
commitment even exist! In fact, it's clear that very little, if any, Central funding will find its way to the port.
In short, it's best to let Vizhinjam stay the course and carry on along its part to a speedy EPC tender so that come November 1 (richly ironic in that it commerates an event that probably contributed in no small measure to the neglect that the project suffered over the past 60-odd years), 2013, actual construction work on the project can be inaugurated atoning for so many years of broken, false promises to the good people of Trivandrum. About time that the Government of Kerala put its money where its often loud mouth is.
I am sure we all agree on that!
