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Kerala sets rates on par with Colombo for Vizhinjam port project

Kerala sets rates on par with Colombo for Vizhinjam port project

The Kerala government has set rates on par with Colombo port as it enters the final lap of an auction to select a private firm for running a container trans-shipment terminal at Vizhinjam port near Thiruvananthapuram.

The southern state is the first to follow the so-called model concession agreement being finalized by the Union government for state-owned ports such as the one planned at Vizhinjam when the project avails a viability gap funding (VGF) from the central government. Kerala has sought VGF for the Vizhinjam project, billed the biggest infrastructure project yet in the state, to boost its viability. “The Union government has started the process of appraising the project for VGF and a decision is expected in the next few days,” a spokesman for the Kerala government said. A model concession agreement sets out the terms and conditions of a port contract, including the rights and obligations of both the parties. Viability-gap funding refers to a one-time grant given by the central or state government for supporting public-private-partnership (PPP) projects in infrastructure that are economically justified but fall short of financial viability. A project can secure as much as 20% of the capital costs as viability gap grants from the central government. The state government which is implementing the project can chip in with a matching 20% grant. The combined viability-gap funding for the Vizhinjam project is estimated at Rs.1,600 crore with the centre and the state governments contributing Rs.800 crore each. The bidder seeking the lowest grant will win the Rs.3,950 crore project with a capacity to load 2.8 million standard containers.

Adani Ports and Special Economic Zone Ltd, Essar Ports Ltd, Gammon Infrastructure Projects Ltd, a consortium of Srei Infrastructure Finance Ltd and Obrascon Huarte Lain SA, and a joint venture of Concast Infratech Ltd and Hyundai Engineering and Construction Co. Ltd have been short-listed for the project. Bidders have time until 18 July to submit their price quotations. A container trans-shipment terminal acts like a hub into which smaller feeder vessels bring cargo, which then gets loaded onto larger ships. Larger vessels bring about economies of scale, and lower the cost of operations for shipping lines, which then translates into lower freight rates for exporters and importers. Being a port owned by the state government, Vizhinjam is free to set rates for services. In comparison, ports controlled by the Union government are regulated by the Tariff Authority for Major Ports (TAMP).

However, a tariff cap is being set for the project because a pre-determined tariff is a prerequisite for availing viability gap funding from the Union government, according to the eligibility criteria for VGF. “For trans-shipped export-import containers, the private operator will be allowed to levy rates not exceeding the maximum rate levied at any major port (those owned by the Union government) in India or any similar port in Asia (read Colombo),” the Kerala government spokesman said. “For non-trans-shipment containers, the operator will be allowed to collect rates not exceeding the maximum rate levied at any major port in India.” The rates so set act as an upper limit or ceiling beyond which the private operator cannot charge customers. The rate will be indexed to Wholesale Price Index (WPI), a measure of costs, to account for inflation. Private operators will be free to levy rates from customers within that cap. The pre-determined rate will remain valid for 10 years, after which the operator will be free to levy rates based on competition. Vizhinjam is being developed to compete with Colombo because its basic infrastructure such as water depth and proximity to the main shipping lane is better than or similar to Colombo, which is the biggest trans-shipment facility in the region. Colombo and Vizhinjam are located in close proximity to international shipping routes involving only a marginal diversion of about 20-25 nautical miles.

While Colombo has a water depth of 16-18 metres, Vizhinjam will have much deeper berths and approach channel of up to 20 metres, capable of docking mega container ships. As such, the rates will play a key role in the success of Vizhinjam. “The container cargo related charges at Colombo are at least 25% lower than Cochin port,” says Deepak Tewari, the chief executive officer of MSC Agency (India) Pvt. Ltd, the Indian unit of Geneva-based Mediterranean Shipping Co. SA and the world’s second biggest container shipping line. “In the case of vessel-related charges, the rate difference between Colombo and Cochin is even wider.” “Vizhinjam cannot attract container cargo unless the tariff is competitive with nearby trans-shipment ports such as Colombo,” the spokesman for the Kerala government said. About 2 million containers originating in and destined for India gets trans-shipped at Colombo every year. Vizhinjam has received the key environment and coastal regulation zone (CRZ) clearances from the ministry of environment and forests. It has also made an application to the shipping ministry for relaxing a so-called cabotage rule to allow foreign-registered ships to haul container cargo between different Indian ports, including Vizhinjam


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