Last week, the state Government decided to adopt the tried and tested “LANDLORD” Model to implement the Vizhinjam International Port. There are several misconceptions and most people do not understand the concept. The previous two failed rounds of b
idding had adopted the BOT model (Build-operate-transfer), in which a private partner consortium is selected by tender basis, to come and build the entire port and also operate it on a long term concession basis.
It is important to understand why the Government (through VISL or Vizhinjam International Seaport Ltd) has gone in for a different model, viz Landlord this time and not chosen to repeat the previous BOT model. The most authoritative news about this plan appears in the Hindu Business Line of 15th October (link below).
Most of the country’s ports are landlord ports in which Government (through the port authority like Cochin Port Trust) retains ownership and control of the port land and infrastructure (not just land, rail, road but also breakwater and reclaimed land on which the actual port terminals, quays are to be built). The Port Authority then leases the infrastructure and assets to a private operator to establish the superstructure on these land and infrastructure assets (includes terminals, berths, quay walls), to bring the equipments (cranes, lifts etc) and operate/manage the port on a concession basis for 25-30 years. This arrangement is much like a landlord building a house and then renting it out to a tenant to live in.
The failed bids earlier were for BOT model, in which ownership passes to the private partner consortium who then builds the entire port and its infrastructure and then operates it. The main selection criterion in that method is how much financing support the private partner requires from Government to build the port.
The Landlord model has been recommended by the project advisors IFC, after detailed studies and international marketing roadshows in which feedback was elicited from large ports and operators around the world. Extensive consultations were held with all parties that submitted the EoI (31 firms submitted expressions of interest in August this year, a tremendous response). These include domestic firms like Reliance, Essar, GMR, GVK, L&T, HCC, Mundra, etc and international firms like PSA, Barcelonal port, Amsterdam port, Rotterdam port, Tertir Group, CMA CGM, Bollores, ICTS etc. The reports were discussed by VISL Board of Directors, expert committees and then placed before the state cabinet that approved the choice of landlord model last week.
Why is the Landlord model preferred and why was the BOT model shelved this time? The main reason is that the first phase of the project involves building the greenfield port infrastructure at a cost of Rs 1700 crore which includes the major cost of port infrastructure like a 3km breakwater into the sea (more than Rs 1000 cr), reclaiming 110ha of land on which the port terminals will be built and the quay walls, berths.
For any commercial private operator to invest in building all this huge infrastructure, would make the project commercially impossible for them since recovering this investment would be impossible. Remember that vizhinjam competes with colombo and Vallarpadam not to mention the ports on the east coast and Dubai etc. Moreover, there is hardly any industrial activity in the region to produce export-import cargo that could sustain revenues for a huge port. A transhipment port by itself, is not profitable enough for port operators.
Therefore, the Government has decided to invest in the port infrastructure to make the port project viable, in order to attract the genuine port operators rather than construction agencies (like last time), whose only interest was to squeeze the profits from the construction contract and they were not too bothered about the long term port operations. Also, unlike last time there is no huge land parcel being thrown in to sweeten the deal and to attract real estate companies that can sit on the huge SEZ. Remember that last time when Lanco etc bid, there was a plan to acquire 1100 ha of land to be given to the developer. But as soon as this plan was scaled down due to public protests against acquisition to only 120 ha, Lanco withdrew under the pretext of court case and delays.
So what does the Landlord model entail? There will be two global bids:- first bid will start in November this year to select a consortium partner who will build the port superstructure, terminals, equipment and will get a 25 yr concession to operate the port. He will be the tenant who will give the landlord Government/VISL a share of revenues/profit. Subsequently, mid next year there will be another bid to select an EPC contractor who will construct the port infrastructure like breakwater, reclaim land etc on behalf of Government. This will be done after finalizing the port design and technical details in consultation with the selected port operator and their plans for terminals, berths etc. The port operator will also get a right of first refusal on the subsequent EPC bid, a preference in case they match the lowest bidder for EPC work.
The size of the project in this first phase is Rs 2500 cr or so, including the EPC contract cost of Rs 1600 cr (infrastructure construction) and Rs 900 cr for the PPP operator bid that is for port operations. So all the stories about only public sector doing the project are wrong. There will still be a bidding process and a PPP partner is still going to come to operate the port and develop the superstructure. The only difference is that the port infrastructure will now be built and financed by Government, instead of expecting a private partner to do that. In any case, even the private partner would have asked for state support to meet the cost of the infrastructure, and so in this model also the same applies, except that ownership and control this time vests with the Landlord who simply contracts out the construction and leases the port to the operator.
So where does the recent news of SCI fit in? It was rumored that Shipping Corp of India (a central PSU) has offered to join in. Correct, they have offered to partner with Government as a joint landlord, which would help to raise the funding of Rs 1600-1700cr required to build the port. However, the talks are in preliminary stages only and require clearances that would need several months – Government will only proceed with SCI if they bring in a sizable investment. In any case, there is no point in waiting for the talks to conclude, SCI and other partners can always join in at later stage when they are sure about how much they can invest to partner with the Landlord. Meanwhile, Plans are to start the bidding for private operator selection immediately. Even if SCI comes in, even then a private operator would be needed – since SCI would only be joint landlord and do not have port sector experience. So the global bid for operator selection is slated to start next month.
It is expected that state will meet its financial commitment to build the infrastructure by raising a loan or borrowing on long term basis from financial installments or placement of bonds. This borrowing can be repaid over a period of 10-15 years by annual installments from state budget grants to VISL (maybe 200 crores every year for 10 yrs)). This decision is expected to be taken by the state cabinet tomorrow and talks are being held with various agencies like ADB/World Bank for this purpose. SBI Capital has been engaged as adviser for raising funds or bond issue as the case may be.
VISL together with CII is organizing a Maritime opportunities conclave in mid November in which business leaders and maritime companies from around the world will participate. Vizhinjam will be showcased at this event and there will be focused sessions on Vizhinjam for the potential investors as well as site visits to the project. Currently land acquisition is going on in full swing and environmental studies are progressing. Road construction has started and Railways have given approval for construction of rail line.
So looks like Vizhinjam is no longer a pipe dream! Things are really on a roll…