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Chasing shadows27 Jul 2015

How will India respond to disquieting developments on its doorstep, asks Stevie Knight

Colombo, the well-established Sri Lankan transhipment hub that’s been so successful at helping itself to alarge slice of Indian transhipment cargo, is expanding its West Terminal by another 2.4m teu. Further,despite cold feet about the amount of debt, the Sri Lankan government is still behind Hambantota’s PhaseII which includes 2km of box berths alongside other general purpose facilities.

This is disquieting for India, which has “shown its concerns over these developments”, says NiveshChaudhary of Drewry. Firstly, India hasn’t yet got a proper hub of its own and its infrastructure is fairlydated: “Most major, (state-owned) ports are running very close to full and have capacity issues on thehorizon, so a lot of ports will need to be looking for immediate investment.”

Secondly, there’s old business between India and China: China’s playing with Pakistan’s militaryambitions, relations have somewhat soured over Tibet and now the large footprint of Hambantota may beplaced squarely on India’s doorstep.

The Hambantota deal originally cut in 2008 was for an estimated $361m backed, to the tune of 85%, bythe Bank of the People’s Republic of China; construction was to be via state-run China HarbourEngineering Company (CHEC) and China Merchants Holdings International. This may have simply raiseda few eyebrows, but when it became apparent that Sri Lanka had also granted Chinese state-ownedcompanies the concession rights in exchange for an easing of loan conditions, the news didn’t go downtoo well in India and stirred up trouble: “The project was put on hold for quite a long time because of therisks associated with it,” says Mr Chaudhary.

However, despite the Sri Lankan government’s concern that the Hambantota project leaves the countrydeeply in debt to China (with the extra worry that a default would give China de facto control over a majorpiece of infrastructure), it seems that backing out now will cost more than seeing it through.

Chinese help

Mark Womersley of Seaport Consultants Asia says that although initiatives like China’s ‘Maritime SilkRoad’– which aims to tie its surplus to new markets – can be very useful in giving economies a helpinghand this can be a double-edged sword. China, despite outward appearances, is not particularly ‘global’ inits allegiances, preferring to bring in design, operators and even labour from home, a habit which oftensets local resident’s teeth on edge.

Further he adds that while the Chinese state-run companies are very efficient when it comes to getting theinfrastructure in place, they are not so hot at managing its forward development. Lastly, not all the ‘help’ isof equal value.

While Mr Womersley admits Colombo, one of the first ports in the area to benefit from Chinese input, hasdone exceptionally well he says “this was partly down to the involvement of China Merchants, a verycommercially oriented company, along with support from the Asian Development Bank”.

However, he points to Gwadar in Pakistan as an instructive lesson in two parts: the earlier phase ofdevelopment which covered three multipurpose berths “had a reason to happen and was managed by alocal PSA International team”.

This changed in 2012 with the termination of PSA involvement amid accusations of the operation simplynot living up to expectations. Mr Womersley believes that this simple wasn’t a realistic appraisal, and hesays the later phase at Gwadar which involves a 1,200m container terminal and hinterland connections,“has been politically driven rather than making particular business sense”. While an economic corridorfrom China’s remote, landlocked western quarter might help Gwadar gain a little traction “its 3,000km of along, hard land crossing” and he says it may not come to much – along with Gwadar’s ambitions.

More, although the two governments have portrayed the deal as neighbourly, Pakistan may find the termsare intensely commercial rather than friendly: recently China’s been defending a 6.3% loan rate on otherprojects – such as Hambantota.

So, despite the switch of operator to the China Overseas Port Holding Company and predicted massiveUS$46bn investment in the entire corridor, Mr Womersley still doesn’t hold out much optimism for Gwadar.

Likewise, the Hambantota development may not have the necessary driver for real growth and there maybe reason to suspect its motives. Mr Womersley points out the harbour does not seem to have been builtfor commercial operations, but laid out, further inland than the obvious deepwater spot, for somethingmore akin to strategic defence with berthing more suited to military vessels.

Lacking muscle

Despite all this, while India may moan about China’s presence, it just hasn’t proved equal to taking it on ina commercial setting. It has lacked the deep pockets or muscle that comes with straightforward supportfrom home – and for better or worse, it’s democratic procedures seem to be no match for a simple one-party state.

But that could change. India, prodded hard by all this activity next door, is responding.

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Page 1 of 3Port Strategy - Chasing shadows

08-09-2015http://www.portstrategy.com/news101/world/asia/south-asian-ports-not-all-it-seems

Mr Chaudhary explained there’s been a lot of talk about Prime Minister Narendra Modi’s ambitious plansto raise the game. Firstly, the Tariff Authority for the Major Ports (TAMP) has, after years of heatedbickering and court cases, being wound up allowing market-linked tariff for the 12 government ownedports.

Secondly, despite some limited schemes being in place since the mid-1990s, Mr Chaudhary explains thatprivate finance has historically been reluctant to get onboard due to messy environmental clearances,security clearances and litigation. However, India now has an all-encompassing initiative that aims toshake up Indian bureaucracy by tying authorisations into a transparent online portal, cutting out red tape,delays and outright backhanders. Mr Chaudhary, for one, is hopeful of a brighter future.

Given all this David Wignall, author of an ADB study on ports in the Bay of Bengal, says it’s possible - heemphasizes ‘possible’ - that either Chennai or Ennore could eventually start to compete with Colombo.Chennai still has a healthy container throughput, handling 1.6m teu last year (despite bulk and automotivetroubles) and is putting an ‘outer harbour’ 4m teu box and automotive proposal on the table for privatepartnership consideration.

Alternatively, neighbouring Ennore could lead the way. It’s ramping up box throughput a year earlier thanexpected with Gautami Adani’s Kamarajar facility which will eventually have capacity for 1.4m teu, as wellas automotive and general cargo. Predictably this has led to unfavourable comparisons between ‘bloated’Chennai and lean and fast Ennore - the only corporatised major port so far.

However connectivity, the main reason Chennai’s earlier mega container terminal plan failed, remains anissue. Ennore’s promised highway links are still not fully realised and the big container stop planned forthe truck-congested road shared by both ports will only alleviate a small amount of the troubles.

Mumbai madness

The big snarl up is of course in the region around Mumbai. In an attempt to bring efficiency into JawaharlalNehru Port, Gateway Terminals India operator APM Terminals and DP World have joined forces on a‘paperless port’ initiative. But it will probably take more than that to clear the regular queues outside thegate: volumes at GTI hit a record high of 2.1m boxes last year and the port is creaking. The operatorsappear to have a fraught relationship with freight associations who have spoken of a 24 or 36 hour waits,despite APMT’s protests that the queues are a knock-on effect of the construction traffic for JPNT’s badlyneeded fourth terminal. Further, another initiative to get ahead of the game landed GTI in more troublewhen extra costs for (soon to be mandatory) container weighing were simply added onto the fees.

The idea of giving India’s port infrastructure a push isn’t new and some could point to the failure of otherinitiatives and legitimately ask what’s different this time around. In 2012 the (then) government proposedincreasing India’s port capacity by over a third to 1.6bn tonnes by 2017 with as many as five additionalmajor ports. Despite the noise, “nothing much seemed to come of it on the ground”, says Mr Chaudhary.

Some of the delays came about as massive public corruption scandals unwound plans “and this latestgovernment sailed in on the back of all that in 2014 with promises to do much better”, says KaushikJadhou of DBIS: “It’s under a lot of pressure to deliver.”

Recently, the new NMDP project brought focus to bear on two headline facilities, one at Sagar in WestBengal and another at Dugarajapatnam in the Nellore district of Andhra Pradesh. However, Mr Chaudharysays that despite the envisaged $28bn in private funds “past trends suggests that the actual investmentshave been much lower than the targets”, pointing out that government initiatives between 2007 and 2012drew in less than half its $88bn objective. Mr Wignall adds: “Although there may be money to spend, ifthere’s not a corresponding change in the administrative structure, then I can’t see real capacity growthbeing delivered.”

Corporisation charge

However, recent moves may help, says Mr Chaudhary: both Dugarajapatnam and Sagar, like Ennore, arelikely to be corporatised, (potentially other major ports will follow) with a competitive ‘landlord’ model whichshould smooth the way for private involvement. But Mr Wignall remains sceptical, explaining that theNMDP project will still be centrally run and for some this is still not the best way forward. Centralgovernment initiatives leak money and efficiency all too easily.

Returning to the battle for India to get its own hub port and steal cargo away from Sri Lanka, Adani’sAPSEZ group has some political hurdles to clear before getting the go-ahead for the deepwatermultipurpose Vizhinjam concession. This $950m greenfield site on India’s southernmost tip (almostnextdoor to Colombo) probably stands a much better chance of becoming a hub than any other facilitysimply because it’s in the right spot, saving lines the costs of deviating further up the east coast.

Despite the issues around Adani’s ‘sole bid’ for the concession, many believe that if any port can dentColombo’s ambitions, its Vizhinjam.

A matter of individuality

There are those that believe that individual states should be in charge of putting the projects in place on theground in India. They point to the rise of privately run minor ports in Gujarat and Andhra Pradesh which have,with supportive regulation and governance, been able to put the major ports to shame, increasing theircombined throughput from 120m tonnes in 2004 to 417m tonnes in 2014, accounting for around 60% ofIndia’s overall growth.

But while Drewry's Nivesh Chaudhary has to admit that “major ports are losing sheen and market share tominor ports”, he is cautious about a blanket conclusion, explaining that this result is down to a few almostincredibly successful facilities rather than being a broad sweep across the board.

India’s clear winners include Pipavav and Mundra. Mundra developed by leveraging other businesses into theport’s activities including power plants, mining and food refineries and then Gautami Adani added rail, roadand container depots to the structure at the same time as investing heavily in handling equipment to keepturnaround times to under a day.

On Pipavav’s side has been huge restructuring under APM Terminals which offered discounts to get it on itsfeet again. It’s done well - container growth has reached 23%, albeit from a low start, and shares have nowshot through the roof. Further, Pipavav and Kattupalli may gain from government permissions to handle newcar imports.

But Drewry's Nivesh Chaudhary says their policies are only half the story and in fact, both Pipavav andMundra benefit from their position in India’s northwest to attract cargo streams from Gujarat’s dense industrial

Page 2 of 3Port Strategy - Chasing shadows

08-09-2015http://www.portstrategy.com/news101/world/asia/south-asian-ports-not-all-it-seems

Drewry Shipping Consultants Ltd

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hinterland and overspill from congestion at Mumbai and JPNT – although this could change with JPNT’scoming fourth container terminal, expected to be in operation by 2018.

In reality, a closer look at the numbers tells another story says Mr Chaudhary. While between them Mundraand Pipavav accounted for around three quarters of the minor port traffic during spring and summer last year,there are in fact 187 minor ports (as opposed to just 13 major facilities) so by far the great majority of minorports are not doing that well especially since India’s clamp down on coal exports.

He says that giving the major ports flexibility will even the score, adding: “It’s high time that the governmentreformed the public-private project approval process. We need infrastructure support... getting private playersinto the major ports is going to be the way forward.”

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Page 3 of 3Port Strategy - Chasing shadows

08-09-2015http://www.portstrategy.com/news101/world/asia/south-asian-ports-not-all-it-seems