The Hindenburg Research report has given the impression that Gautam Adani's eye-popping riches are mere illusions conjured up by some breathtaking stock manipulation and accounting fraud.
Even if Hindenburg's findings turn out to be true, figures in the public domain show that Adani will have no trouble implementing the Rs 7,525-crore Vizhinjam International Deepwater Multipurpose Seaport.
Reason: The Kerala-Adani Ports agreement does not ask much from Adani. Relative to the gargantuan amounts he deals with, what Adani needs to invest in Vizhinjam is peanuts. It is just a fraction, about 12 per cent, of even the modest Rs 20,000 crore Adani Enterprises Limited hopes to mop up from its latest follow-on public (FOP) offering, a mere Rs 2,454 crore, and this too spread over 40 years.
Right from cost-sharing to a unique pay out called termination clause, Adani seems to have persuaded the Kerala government to do his bidding.
The total project cost of Rs 7,525 crore is the combined sum of core work (Rs 4,089 crore), 'funded' works (Rs 1,635 crore) and external infrastructure (Rs 1,973 crore).
The money Adani's company should have shelled out is estimated as Rs 4,089 crore; this is the cost for the core work like dredging and reclamation, development of berths, roads, substations, superstructure and equipment, and operations.
Adani Ports, however, needs to spend only Rs 2,454 crore, 60 per cent of its total obligation. The remaining 40 per cent, Rs 1,635 crore, will be provided as viability gap funding (VGF) by the State and Central governments together.
VGF is a kind of bait thrown to hook private investors who are hesitant to bet their money on big infra projects fearing it would be too risky.
In addition to the core works, Adani Ports also has to construct the 3.1-kilometre long breakwater and a new fishing harbour for Rs 1,463 crore. Adani will have to find the funds for these but he would be reimbursed in full by the Kerala government. The reason why this component is called 'funded works'.
It was also agreed that the state would bear the entire cost of external infrastructure like road and rail networks to the project site and allied buildings, all of which is estimated at Rs 1,973 crore.
In short, 67 per cent of the investment (Rs 5,071 crore) in the port, better known as Adani port, is made by the Kerala government.
Additional funds for Adani
In fact, the 'funded works' were originally not envisaged as such. The work, the development of a breakwater and fishing harbour, was to be executed through an engineering procurement and construction (EPC) contract as a separate work.
Though the private concessionaire who would win the bid for the port project would be given preference while quoting for this independent EPC contract, the money has to be fully borne by the private party under this model. There is no reimbursement in this model.
Later, after Kerala adopted the Model Concession Agreement drawn up by the Centre, the EPC model was scrapped and the 'funded' model was introduced.
Even by the Kerala government's admission, the cost estimated for 'funded works', Rs 1,463 crore, is on the higher side.
In 2013, long before the project bid was granted, it was pegged at Rs 767 crore. Citing exchange rate fluctuations, this was revised to Rs 1,210 crore in 2014. Then it was revised to Rs 1,463 crore in the final 2015 concession agreement, based on the recommendation made by the Empowered Committee of Secretaries appointed by the Kerala government for the valuation of bids.
The then UDF government had gone on record that the cost of 'funded works was increased to minimise the VGF, or government grant, quoted in the tender.
The tender objective was to pick the bidder who demanded the least grant, or the VGF, from the government. The maximum a bidder could demand as VGF was capped at 40 per cent of the total project cost of Rs 4,089 crore; in this case, therefore, Rs 1,635 crore.
The government argued that the cost of 'funded works' was jacked up for two reasons. One, to lure more bidders. And two, to induce bidders to quote the least amount as VGF.
Both these objectives failed. Adani Ports turned out to be the sole bidder; the other two opted out. And the winner demanded the maximum VGF it could lay claim to Rs 1,635 crore.
A good chunk of prospective investors was spurned by certain unattractive and even forbidding features in the pre-bid documents made available to them.
These did not mention that breakwater and fishing harbour work would be funded by the state. Nor did it have any mention of the concessionaire's right to extract commercial gains from the land provided by the government for the project. Even the concession period was not specified.
Most of these clauses were incorporated later after three bidders were shortlisted.
Even the pre-bid clause that the port should have a capacity of one million TEUs (twenty-foot equivalent units, which is the volume of a 20-foot shipping container) right at the start of the commencement of operations was also revised. It was nearly halved to 0.6 million TEUs, a major relief to bidders.
In a blatant show of favouritism, one lucrative bait for private investors was squeezed in not even after the preliminary shortlisting but after Adani Ports won the bid. In the agreement signed with Adani Ports, the concessionaire was given the right to mortgage all assets, except the breakwater and fishing harbour.
The Model Concession Agreement that Kerala had adopted did not allow this. Under the MCA, project assets could not be mortgaged or pledged to lenders as security for debt incurred by the concessionaire.
In fact, one of Adani's competitors had wanted this MCA clause modified to allow mortgage but the request was rejected by the state government's Empowered Committee of Secretaries. Sources said this bidder had then abandoned its bid.
Clearly, even the MCA, which Kerala claimed to have adopted in full, was conveniently tweaked to grant Adani an exclusive favour.
Keeping Adani's lenders happy
The UDF government had stated on record that this was done to provide "additional layer of security" to Adani's lenders.
There was yet another layer of security offered. Though Kerala makes close to 70 per cent of the investment, Adani Ports is not under any obligation to start sharing the profits right after the port operations reach break even.
It is only from the 15th anniversary of the commencement of operations that Adani needs to start paying Kerala a minuscule concession fee of Re 1 per annum and an additional concession fee of 1 per cent of the total Realisable Fee.
Adani Ports would recoup its investment of Rs 2,454 crore by the 11th year, according to the feasibility report done by Ernst&Young (E&Y), consultants appointed by Kerala government's Vizhinjam International Seaport Limited (VISL).
The Comptroller and Auditor General had noted that this delay in profit sharing would mean a foregone revenue of Rs 2,153 crore.
Then, the agreement has a termination clause, a giveaway absent in other big infrastructure PPP (public-private partnership) projects such as the Hyderabad Metro project or Jawaharlal Nehru Port Trust (JNPT) fourth terminal.
Under the Kerala-Adani agreement, a termination payment has to be made to Adani at the end of the concession period. This is calculated as the realisable fee recovered in the last month of Adani's concession period multiplied by 30. Though 30 refers to the usual concession period of 30 years for big infra projects, it is 40 in the case of Vizhinjam port.
According to the E&Y report, the termination fee Kerala has to pay Adani at the end of 40 years is approximately Rs 19,555 crore. The E&Y report estimates that the revenue (realisable fee) from the Vizhinjam port during the last month of the 40-year concession period would be Rs 652 crore (Rs 652 crore multiplied by 30 would provide the termination fee of Rs 19,555 crore).
However, in the same period, the total revenue Kerala would have collected from the operations of the port is estimated at Rs 13,947 crore.
So, as a kind of parting gift to Adani after 40 years of its port operations, Kerala not only has to forfeit all that it had earned in the 40 years from the port (Rs 13,947 crore) but also fork out another Rs 5,608 crore.
Partners with differing fates
In other words, going by the E&Y estimates, Adani will start earning profits from the 11th year of its operations and by the end of the 40th year, in addition to all the profits he would pocket during the 29 years after the operations break even, will walk away with an additional Rs 19,555 crore.
Here is what will happen to Kerala. The state will invest Rs 5,071 crore. Then it will have to surrender the hundreds of crores that will accrue to it as revenue in 40 years and eventually would stare at an additional loss of Rs 5,608 crore.
The E&Y estimate is part of government documents.