Saturday, July 11, 2015

Capacity sans cargo - port development in India

The Economic Times reports that the Adani Ports and Special Economic Zone (APSEZ) is in talks with Warburg Pincus to buy out its 31.5% stake in the Gangavaram bulk cargo Port. This comes in the wake of news about advanced stage discussions between APSEZ and Larsen and Toubro (L&T) to takeover the latter's Rs 4000 Cr Kattupalli International Container Terminal near Chennai and the award of the Rs 6000 Cr Vizhinjam container port contract by the Government of Kerala to APSEZ. 

The APSEZ had purchased the Dhamra bulk cargo port with a capacity of 100 mt on Odisha coast from L&T and Tata Steel for Rs 5500 Cr in 2014. APSEZ already runs container terminals at Mundra and Hazira, and will soon start operations at Ennore. It had won the tender to operate a container terminal at Ennore with a capacity of 1.4 million twenty foot equivalent units (TEU) at an investment of Rs 1270 Cr by bidding an aggressive revenue share of 37%, the highest in any private port in the country. APSEZ is already India's second biggest container port operator after Mumbai's government owned JNPT. It handled 1.68 mt TEUs in April-December 2014. Vizhinjam will have a proposed capacity of 4.1 mt TEUs and Kattupalli has an available capacity of 1.2 mt. APSEZ's strategy of aggressive expansion through acquisitions has seen it increase the number of terminals and ports operated from just one in 2011 to eight today. The strategic sweep of these acquisitions, coupled with the nature of port sector activities, appears to raise concerns about competition and monopoly. 

The current available annual container capacity on the east coast is about 6 mt TEUs, whereas the actual volume was 2.3 mt in 2013.  This has meant that terminals like Kattupalli has been lying idle for lack of cargo. In fact, inside Andhra Pradesh itself, bulk cargo port capacity worth over 700 mt has been given out on concessions whereas the actual cargo realization is far less than 100 mt. Ennore and Vizhinjam put together will add over 6 mt of container capacity in the next few years. Given this capacity glut, for developers like APSEZ, there are very long term strategic acquisitions, though the possibility of cannibalization of traffic looks real.  

But for governments, such premature concessions looks most certain to turn out as very bad deals. Given the vast uncertainty associated with patterns and pace of development, such long-term mortgages of large extents of land and valuable water-front (there is only so much of deep draft sea-front available!) at today's terms and conditions represents extremely short-sighted policy making. This assumes even greater significance in light of the global business model in container ports. The port operator acts as a landlord, like with the major ports in India, and contracts with others to operate terminals. The resultant competition among terminal operators in the same port mitigates any monopolistic trends. In contrast, Indian terminal operators also generally own the ports.

Private ports in India have hitherto been contracted as entire ports, not terminals. This was understandable given the lack of ports themselves. Now that a number of ports have been contracted, any capacity addition should come from the full realization of the capacity of these ports. Again, as in Andhra Pradesh, while land has been allotted to realize capacity of more than 700 mt, just under 100 mt has been developed. Since developers are obligated to develop their full capacity within a contractually defined period, new capacity addition should come from the development of capacity in the already contracted out port. New port concessions have to be put on hold. Why isn't a PIL on this coming? 

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