Why is it unethical for Congress to support 'freeze Vizhinjam port' demand

Vizhinjam Port. Photo: Manorama

After the Vizhinjam Samara Samithi leaders met him during the Bharat Jodo yatra on September 12, Congress leader Rahul Gandhi asked the Kerala Pradesh Congress Committee (KPCC) to make its stand clear on the primary demand of the agitators, which is immediate halt to the Vizhinjam port construction. Gandhi could not have pushed the KPCC into a greater dilemma.

If the KPCC supports such a demand, the desperate measures adopted by the Oommen Chandy government between 2013 and 2015 to lure private investors, especially Adani group, to an ambitious port project will come to nothing.

It was the Congress-led Oommen Chandy government that crafted a lopsided agreement that would potentially allow Adani to prosper at Kerala's cost.

Kerala-Adani agreement

The Vizhinjam International Deepwater Multipurpose Seaport Project is being done using a public-private partnership (PPP) model on a Design, Build, Finance, Operate and Transfer (DBFOT) basis. It has adopted a 'landlord port' model where the land procurement, external infrastructure and construction of breakwater would be undertaken by the Kerala government through its implementing agency Vizhinjam International Seaport Limited (VISL).

The private concessionaire - Adani Ports and SEZ Private Limited (APSPL) – is responsible for dredging and reclamation (53 hectares) of land from the sea, construction of berths, roads, equipment, substations, superstructure and operations of the port.

Principal Secretary Ports James Varghese exchanging concession agreement with CEO of AVPL, Santhosh Kumar Mohapatra for the Construction of the Port Super structure and operations of Vizhinjam International Deep Water multi purpose Sea Port in the presence of Chief Minister Oommen Chandy, Minister for Ports K. Babu, Minister KM Mani and Group Chairman Gautam S Adani at Durbar Hall in Secretariat on August 17, 2015. File photo: Manorama


The estimated total project cost (TPC) of the project is Rs 4,089 crore. But if funded works like breakwater, fishing harbour and other external infrastructure are also factored in, the total cost (at the 2015 money value) would be Rs 7,525 crore.

According to the terms of Request for Proposal (RFP), selection of bidder was to be based on the highest premium offered to the Kerala government or the lowest grant demanded from the government. Maximum grant that can be demanded by way of Viability Gap Funding (VGF), which is capital support to PPP projects that otherwise would not be financially viable, was capped at 40 per cent of the TPC (Rs 1,635 crore).

Adani Ports, as it turned out, was the lone bidder with a quoted grant amount of Rs 1,635 crore, the maximum. The cncession agreement was signed between Adani Vizhinjam Port Private Limited and the government on August 17, 2015. As per the agreement, when operations commence in 2019 (the original date fixed), the port should have a capacity of 0.6 million TEUs (twenty-foot equivalent units).

The TEU is a unit of cargo capacity used for container ships or ports. It is the volume of a 20-foot-long shipping container, a standard size metal box. It is usual for action filmmakers to stage fight sequences in between and over these large shipping containers.

The concession period is for 40 years, which can be extended for 20 more years.

Adani Group Executive Director Karan Advani meeting with Kerala Chief Minister Oomen Chandy in Thiruvanthapuram during the signing of the Vizhinjam agreement. File photo: PTI

Cost sharing

The core responsibilities -- dredging and reclamation, development of berths, roads, substations, superstructure, purchase of equipment and port operations – were to be done for Rs 4,089 crore, of which Rs 2,454 crore will be the share of the concessionaire and the rest Rs 1,635 crore will be provided as VGF by the government.

It was agreed that the 3.1-kilometre breakwater and fishing harbour would be constructed by the concessionaire but the entire tab of Rs 1,463 crore would be picked by the Kerala government. The cost of external infrastructure, Rs 1,973 crore, was also to be funded fully by the Kerala government. All of this together will add up to Rs 7,525 crore.

Gautam Adani visits Opposition leader VS Achuthanandan after the signing of the agreement for Vizhinjam International Deep Water multi purpose Sea Port. Photo: Manorama

Of this, Kerala government's investment would be Rs 5,071 crore and that of Adani, Rs 2,454 crore; a 67:33 ratio favourable to Adani Ports.

Though Kerala makes close to 70 per cent of the investment, Adani needs to start paying a minuscule concession fee of Re 1 per annum and an additional concession fee of one per cent of the total Realisable Fee only from the 15th anniversary of the commencement of operations. In the feasibility report done by Ernst & Young, consultants appointed by VISL, Adani Ports would recoup its investment of Rs 2,454 crore by the 11th year.

What's more, the concession agreement allowed Adani to utilise 30 per cent of the land acquired for the project by the Kerala government for what has been termed “Port Estate Development”, which may include residential and commercial buildings.

Vizhinjam International Seaport Limited under construction. File photo: Manorama

Surprising cost escalation

Before the agreement was inked, the construction of breakwater and fishing harbour was initially planned to be executed through Engineering Procurement and Construction (EPC) contract as a separate work. However, following the adoption of the Model Concession Agreement (MCA) developed by the Planning Commission of India for PPP projects in the Ports Sector, the tender for EPC contract was cancelled in August 2015, and these works were included as funded work.

When this change happened, the cost was reworked to Rs 1,463 to be fully funded by the government. This meant a steep 90 per cent rise in cost, from the original 2013 estimate of Rs 767 crore to Rs 1,463 crore in 2015.

The Chandy government then said the cost of funded works was increased to attract bidders and also to minimise the government grant (VGF) to the concessionaire. As it turned out there was just one bidder, Adani Ports and SEZ Private Limited, and a step up in the government funds did not restrain Adani from asking for the highest possible government grant (VGF) of Rs 1,635 crore. The government yielded.

Adani's gain, Kerala's loss

Net Present Value (NPV) is the difference between a project's financial benefits and costs in current money terms. According to the guidelines issued by the Union Ministry of Finance, only projects with positive NPV should be developed because negative NPV would mean that the costs are greater than the benefits.

Ernst & Young (E&Y), the financial consultants appointed by VISL, had estimated in 2015 that there would be a depletion of value, a negative NPV of Rs 3,866 crore for Kerala. For Adani, there would be an accumulation of value, a positive Rs 607 crore.

The Chandy government had argued that these losses would be compensated by a growth in local employment and other economic benefits that would rush in once the port becomes operational. Fact is, even if other economic benefits like employment generation and improved infrastructure are taken into account, there would still be a value depletion of Rs 835 crore for Kerala government.

Clearly, to get a major infrastructure project moving in Kerala, the then Chandy government seemed bothered only about the gains that would accrue to the private partner.

Protest against Vizhinjam port in Thiruvananthapuram in 2022. File photo: Manorama

Termination jackpot

The Internal Rate of Return (IRR), the rate at which financial benefits accrue from an investment, is estimated to be 3 per cent for the government and 15 per cent for Adani. But when the termination clause approved by the Chandy government is factored in, even this low IRR seems an overestimate for Kerala and an underestimate for Adani.

Based on the E&Y estimates, the total revenue that would accrue to the Kerala government during 40 years of the concession period would be Rs 13,947 crore. The termination payment that has to be made to Adani as per the concession agreement at the end of 40 years, assuming that they are not keen on extending the contract for another 20 years, has been worked out to approximately Rs 19,555 crore.

(This figure is arrived at on the assumption that on the 40th year after the port commences operations, the Realisable Fee from the port would be Rs 7,822 crore. The termination fee, as approved by the Oommen Chandy government, is the monthly Realisable Fee at the 40th year, 7822 /12, multiplied by 30*.)

Therefore, Kerala government's net receipts from the project after 40 years would be minus Rs 5,608 crore; Rs 19,555 crore (termination payment) minus Rs 13,947 (total revenue). The E&Y Feasibility Study had laid bare such a loss before the Oommen Chandy government before the agreement was inked.

If this termination payment is also factored in, Kerala government's IRR, which is now pegged at 3 per cent, would become negative and that of Adani will rise to 16.08 per cent from the estimated 15 per cent. And Kerala's NPV or depletion in value would be higher at Rs 4,441 crore and Adani's accumulation would be higher at Rs 8,42 crore.

Kerala chief minister Pinarayi Vijayan greets Adani Ports CEO Karan Adani in Thiruvananthapuram on Thursday. PTI

For Adani, such a termination clause would be like the icing on the cake. Such a termination clause is not included in the concession agreements executed for other major PPP projects such as the Hyderabad Metro project or Jawaharlal Nehru Port fourth terminal, Mumbai.

Longer contract, longer profits

The standard concession period for PPP projects is 30 years. Further, in the study report on the Vizhinjam project by the International Finance Corporation (IFC), the Concession period was recommended as 30 years.

However, the government ended up offering a 40-year concession period. According to the feasibility study by E&Y, the extra 10 years would allow Adani to collect an additional revenue of Rs 29,217 crore.

Kerala Chief Minister Oommen Chandy, Union Minister Nitin Gadkari and Gautam Adani during the laying of foundation for the Vizhinjam port. Photo: B. Jayachandran

Exclusive favour for Adani

Under the model concession agreement drawn up by the Planning Commission, project assets, including the right of way over the site, were excluded from assets and rights which could be mortgaged or pledged to lenders as security for debt incurred by the concessionaire.

This did not deter the Kerala government from including a clause in the concession agreement (Article 41.5) that gave Adani the right to mortgage all assets (except breakwater and fishing harbour). The reason given was that “it would provide an additional layer of security to lenders."

This might seem like a government's determination to lure private investors till it is realised that such a clause was inserted after the bid was awarded. In fact, the empowered committee of secretaries of the government had in 2015, before the opening of the bid, rejected a similar demand made by another bidder. This bidder then quit the race.

“Hence, the modification post award of concession (contract) was contrary to the advice of the tTechnical Consultant and conferred upon the concessionaire the right to mortgage assets which include land taken over by the GoK at a total cost of Rs 548 crore,” the Comptroller and Auditor General said in its report in 2017.

Congress version

However, Congress leaders Onmanorama talked to said that in 2013 (when discussions were beginning to firm up) such a massive infrastructure project was unthinkable for a state like Kerala. "The UDF government, by making the agreement attractive to a private partner, was only trying to make the impossible happen," a Congress leader and a former MLA said.

Since the issue was under the consideration of the KPCC no one was willing to come on record. “Now, even the LDF government concedes that the project would do wonders for Kerala in the long run,” another Congress leader said.

The leader also said the Justice C N Ramachandran Nair Commission appointed by the first Pinarayi Vijayan ministry to see if there were lapses in the Adani-Kerala agreement had categorically ruled out corruption. “If at all there were mistakes, it was done in good faith,” he added.

(*As per standard concession period)

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