MUMBAI: The Union government has rejected a request from the Kerala government to waive off the condition on sharing the revenue the Southern state receives from the Vizhinjam port project till the Centre’s contribution of the viability gap funding (VGF) of Rs817.80 crores is repaid fully in net present value (NPV) terms, documents show.
On 3 February 2015, the then Finance Minister Arun Jaitley had signed off on an “in-principle” approval to grant viability gap funding for the Vizhinjam multi-purpose and container transshipment port – the first and only Indian port yet to receive such a grant – with the explicit condition that the Kerala government would share 20 percent of the revenue accruing to it after 15 years of the port starting operations with the Union government, until the Centre’s grant of Rs817.80 crore is repaid in NPV terms.
VGF is a one-time grant given by the Central government for supporting public-private-partnership (PPP) projects in infrastructure that are economically justified but fall short of financial viability.
The VGF of Rs1,635 crore, the grant sought by the winning bidder – Adani Ports and Special Economic Zone Ltd – to build the new port, will be contributed by the Union government (Rs817.80 crore) and the Kerala government (Rs817.18 crore).
As the initial 20 percent of the VGF is being provided by the Centre, the recovery of the Union government’s VGF as a percentage of revenue share should be given priority, the Finance ministry had stipulated while according “in-principle” approval for the grant designed to boost the port’s viability.
Only after the recovery of VGF of the Central government in NPV terms, the concessionaire (APSEZ) should pay the revenue share to the Kerala government, the Finance ministry said at the time.
The priority payment clause was introduced to overcome concerns that the Central government’s contribution of the grant in NPV terms “may not be repaid in full in the project’s lifetime” based on the prescribed revenue sharing mechanism.
Even with the priority payment clause, “there may be a possibility that the GoI grant in NPV terms may not be repaid in full,” the Finance Ministry said.
The Kerala government has decided to collect revenue share from the private operator from the 16th year of operations that will be equivalent to 1 percent of the gross revenue from the facility. The premium collected from the private operator will rise by 1 percent every year till it reaches 40 percent.
In turn, the Kerala government had agreed to share 20 percent of the annual premium it collects from the private operator with the Centre till the VGF is repaid.
The Kerala government subsequently requested the Department of Economic Affairs (DEA) in the Finance Ministry to consider waiving off the condition on sharing revenue with the Union government.
During an inter-ministerial meeting called to consider “final approval” for VGF, the Kerala government said: “VGF is a grant and expecting repayment of VGF in NPV terms, makes it akin to a loan. The government of Kerala, hence, has made a request to do away with the repayment of GoI grant”.
The DEA had capped the VGF for the project at Rs1,635 crore (with the Centre pitching in with Rs817.80 crore) which was computed based on the public-private-partnership (PPP) component of Rs4,089 crore of the total project cost of Rs7,700 crore.
The VGF sought by APSEZ is less than 40 percent of the PPP component of the total project cost, the limit set for dispersing VGF.
The NITI Aayog, the Department of Expenditure and the Ministry of Ports, Shipping, and Waterways were of the view that revenue sharing with the government of India by the Kerala government should be in line with the conditions laid down during the in-principle approval for VGF.
“The request of the government of Kerala for waiving the revenue share with the government of India is not accepted,” according to the minutes of the inter-ministerial meeting headed by the Secretary, DEA that granted “final” approval for the VGF. ET Infra has reviewed a copy of the minutes of the meeting.
“The request of the government of Kerala for not imposing an additional condition of giving priority to the government of India in revenue share is accepted. The formula given in the in-principle approval for revenue share between government of India and government of Kerala shall prevail,” the inter-ministerial meeting decided unanimously.
The inter-ministerial meeting further agreed that the government of Kerala should enter into an agreement with the government of India (DEA) before disbursement of VGF, for sharing of revenue, the DEA said, while pointing out that the concession agreement signed between the Kerala government and APSEZ for constructing Vizhinjam port “does not have any clause on revenue share” for recovery of VGF.
The VGF will be paid to the concessionaire (APSEZ) in two parts – as equity support during the construction of the project and as operation and maintenance support after commercial operation date (COD).
The equity support will be 150 percent of the equity brought in by the concessionaire subject to a limit of 30 percent of the total project cost. Due to this, Rs408.90 crore will be paid by the Kerala government as VGF during the construction period while the remaining Rs408.30 would be given as operation and maintenance support.
The first phase of the port (400 metre quay) is expected to be commissioned by March 2024 and the balance (400 metre quay) by May 2024 with a capacity to handle 1 million twenty-foot equivalent units (TEUs).
Vizhinjam is being developed as a container transhipment port to compete with Colombo port because its basic infrastructure such as water depth and proximity to the main shipping lane is better than Colombo — the biggest transhipment facility in the region.
The new port, according to port and shipping industry sources, is best suited to cut India’s dependence on Colombo to send and receive cargo containers entailing extra time and costs for exporters and importers.
Vizhinjam has 20 meters of natural water depth that allows big mainline ships to dock, a key requirement for hosting a transhipment hub. Further, the port is only 12 nautical miles from the international shipping route, with minimum deviation for shipping lines, resulting in savings in extra fuel costs for the detour.
Annually, around 3 million twenty-foot equivalent units (TEUs) of India-bound cargo containers are transhipped at Colombo, Singapore, and other regional ports, according to government estimates. Colombo, Singapore, and Port Klang handle more than 85 percent of this with Colombo alone accounting for some 2.5 million TEUs.
“Given the extra port handling charges incurred at the transhipment hubs, transhipment of cargo results in logistic cost inefficiencies for Indian industry. The additional port handling cost is to the tune of $80-100 per TEU, which could be saved if the container was imported/exported as direct gateway cargo instead of being transhipped,” the Maritime India Vision 2030, a ten-year blueprint for the maritime sector, pointed out.