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).

 

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 7^th 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.

At mtg of Board of Directors,made strong case to proceed w/EPC work on constructing Vizhinjam Port as soon as environmental clearance recd
— Shashi Tharoor (@ShashiTharoor) February 18, 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!