Source: ET Infra
Potential bidders are calling for “re-working” the project cost estimated by the state-owned port authority in a global tender which some say was lesser by “at least 50 percent.”
The port industry’s apprehension on the ambitious project mainly revolves around the “unrealistic” cost estimates worked out by the VOC Port Authority with the help of the National Technology Centre for Ports, Waterways and Coasts (NTCPWC) under the Indian Institute of Technology Madras (IITM) on dredging and breakwater construction.
The National Technology Centre for Ports, Waterways and Coasts, the technology arm of the Ministry of Ports, Shipping and Waterways, was hired on nomination basis by VOC Port Authority to write the Detailed Project Report (DPR) for the mega project.
Based on the NTCPWC DPR, the port authority has pencilled in Rs698.45 crores for constructing a 5,535 km-long breakwater and Rs1,233.51 crores for dredging in the basin and outer harbour channel (with dredging quantity of 10.96 million cubic metres) for the first phase of the project and Rs187.11 crores (1.23 million cubic metres) for the second stage of the facility.
From the shore to up to 3.8 kms, 80 percent material is rock and 20 percent sand. Beyond that, 80 percent is silt and 20 percent is rock, according to the port authority.
“After reviewing the estimates, there are two areas, which as a consultant, I find needs in-depth cost analysis. One is the breakwater and second is dredging,” Devdatta Bose, port expert representing Tata Consulting Engineers Ltd, said at a road show held by VOC Port Authority in Mumbai on Monday to woo private investors for the project.
The breakwater cost has been estimated by NTCPWC at Rs12.6 lakhs per metre, which at a depth of (-) 17 metres, will work out to about Rs30-35 lakhs per metre, translating into some Rs2,000 crores, whereas the estimate under this head is Rs698.45 crores, Bose said.
“If we compare the rate at Vizhinjam Port being constructed by the Adani Group, it is almost Rs57 lakhs per metre (translating into some Rs1,800 crores). At Vizhinjam, only 3.15 kms of breakwater has been built so far, almost at the same depth of 18-20 metres. Adani faced challenges in sourcing rock for breakwater construction for Vizhnjam Port, which had to be transported from quarries in Tamil Nadu. Even if I take out about 25 percent (due to the locational advantage of VOC Port to quarries), then also it is Rs35 lakhs per metre. At this rate, the breakwater cost for the Outer Harbour project comes to around Rs2,000 crores, which is almost three times the cost estimated by the port authority,” Bose noted.
The second issue is dredging, where 80 percent of the dredged material will be rock while only 20 percent will be sand and silt. The dredging rate worked out by NTCPWC is Rs1,267 per cubic metre, which may not be a practical rate, he said.
“Hard rock and soft rock cannot be differentiated when a powerful cutter suction dredger is deployed to undertake dredging. So, the dredging rates may be well over Rs3,500 per cubic metre at the current market rate, including mobilisation and demobilisation costs, which is at least 2.5 times the cost worked out by NTCPWC. Hence, I find that the difference in costs is about Rs3,000 crores in the first phase itself. Keeping aside all the other parameters which can be reviewed only when the port authority shares the DPR, in a nutshell, the project cost in Phase 1 itself will be in the region of Rs7,500 crores from the estimate of Rs4,494.46 crores and Phase 2 will be about Rs3,000 crores from the estimate of Rs2,561.49 crores, taking the total project cost to about Rs10,500 crores,” Bose said.
The port authority has sought bids based on the lowest VGF quoted by bidders for developing the project, marking a departure from the model followed so far by the Union government owned major ports wherein cargo handling contracts are finalised on the basis of the highest royalty per twenty-foot equivalent unit (TEU) or per ton of cargo quoted by the bidders.
The VGF shall constitute the sole criteria for evaluation of bids: The project shall be awarded to the bidder quoting the lowest VGF for the 45-year deal. The VGF has been capped at Rs1,950 crores or actual quote, whichever is lower.
“It is worthwhile to revisit the costs which have been set out because this particular bid is quite different from other bids – the winning bidder has to bid on the basis of a discount to the VGF and therefore unless he has a very accurate handle on the costs, it’s going to be very difficult for him later. So, I urge you to relook at the costs,” said Suresh Amirapu representing Singapore’s PSA International Pte Ltd.
The general opinion of potential bidders who attended the road show was to revisit the cost estimates worked out by the port authority or else to raise the viability gap funding to 50 percent of the project cost to make the project viable.
But the port authority is sticking to its estimates, arguing that the dredging rate was “probably justified”.
“Since it is rock only, it is changing things. Because when there is no change in clay and silt, there may not be changes but since rock is there and the quantum of materials and the proportion of rock and silt is there, based on that the rate is arrived. As far as I know, the rate estimated is probably okay, maybe slight fluctuation or escalation may be there, but basic cost will be more or less correct,” said VOC Port’s Chief Engineer K Ravi Kumar.
Besides, the mobilisation of dredging equipment is also important. “When the dredging quantity is high, automatically the cost will be less,” he pointed out.
In European countries, the dredging cost estimates are worked out on the basis of a scientific system.
“The same methodology has been adopted by NTCPWC in our port also depending on the soil investigation. That is the formula/methodology available for arriving at the rates depending on the soil conditions. That is the methodology adopted by NTCPWC based on which we have arrived at the rates. So, as per our knowledge and discussion, the dredging rate is probably justified as compared with the soil investigation data,” Ravi Kumar told potential investors.
“At the same time, this is our investigation report. The agency who is participating in the bid, they are free to do their own investigation also, that’s not a problem for us,” he said.
The port authority said that the cost estimate was prepared in December 2022 and was submitted to the Ministry of Ports, Shipping and Waterways in January 2023 for approval.
Referring to the cost of breakwater construction, Ravi Kumar said that while comparing VOC Port with other ports, the source of materials was key.
“Tuticorin is the source for other ports also. In our estimates, we have considered distance and travel time. In our locality, near about 50 kms of range, we have enough sources of material for the breakwater, that is why it cannot be compared with any other port for breakwater cost,” Ravi Kumar noted.
“For other ports, the source is not there. That is why distance and travel time are the costs though the cost of material is very less. The travel/transport costs are huge, but as compared to other ports, the travel costs for VOC Port are less because within 50-55 kms range, we have enough quarries for our materials,” he asserted.
On price fluctuation and cost escalation for the project including break water construction, since the estimates were finalised, the port authority reckon that it “may not change because the area of sourcing (materials for construction) is very near by”.
“That is the point I want to make. The fluctuation in cost may not be more than 1-2 percent,” says Chief Engineer Ravi Kumar.
Tarkesh Tiwari, Vice President, Strategy and Business Development, Essar Ports Ltd cited two key reasons that posed “great risk on the viability side” for the project.
“Breakwater and dredging are the two areas where the developer will have major concern with respect to costs,” Tiwari said.
“Instead of VGF funding, can it be structured in a manner that the breakwater and dredging is done by the port authority and then the project is bid out. The traffic of 4 million TEUs is going to be a big challenge for the initial years, so the developer should be given more time for developing and flexibility has to be given in a much broader way instead of restricting to two phases. If the port implements these two suggestions, then the attraction of the project will increase significantly,” Tiwari added.
“This project has been conceived and duly approved by the Cabinet and whatever you said is already accommodated. This is done in two phases. Now, we cannot think about changing anything in the scope of work, whatever is there, everything has been duly approved by the Cabinet,” said Ashoka Kumar Sahu, VOC Port’s financial advisor and chief accounts officer.
T K Ramachandran, Secretary, Ministry of Ports, Shipping and Waterways who was instrumental in pushing the much-delayed project during his time as Chairman of VOC Port Authority, assured potential developers that the government has “built in necessary provisions in the sanction orders which enables us to be more flexible” to make the project work.
“So, if the sum total of all the industry representatives’ opinion is that this (the tender terms) needs change, and due to that we have a problem in getting the bids that we expected, then we’ll go back to the drawing board. There is no hesitation in doing that, we have given that authority to go back to the drawing board and look at what can be changed but for that we need one cycle to go through,” he stated.
“Let’s hope that we are able to meet all the expectations to the extent possible but please go through the documents very carefully because a lot of work has gone into the calculations. For instance, the entire rock for the breakwater is coming from nearby Tuticorin,” he asserted.
Stating that it was a very “viable” project, Ramachandran urged port developers to approach it with a “positive mindset”.
“If some other model is to be brought in including VGF spread over some more period or longer phases, we might bring in more changes but for that we need to have you all in the pre-bid very seriously and giving us these suggestions, we can look at them,” he said.
“The one advantage of this project is that the tariffs are absolutely market driven. So, I think it is a very good project, there are a lot of opportunities and a lot of you people have been earning billions of dollars over the last few years and what is One billion dollars, you can easily invest and from our side we will give you all the support that you need. Our aim is by the end of this year, the project should be awarded,” Ramachandran added.
Bose at Tata Consulting Engineers also suggested that VOC Port Authority may consider allocating land for setting up a free trade zone modelled on Dubai’s Jebel Ali Free Zone to increase the attractiveness of the mega project, a suggestion that was acknowledged by Ports, Shipping and Waterways Secretary Ramachandran.
