Last week a consortium led by the Spanish port operator Grup Maritim TCB pulled out of the Rs 1,400 crore container terminal project at Ennore Port in Tamil Nadu. A fortnight ago, Jawaharlal Nehru Port trust (JNPT) terminated its letter of award to PSA International of Singapore to build and operate the Rs 6,700 crore container terminal at Nhava Sheva, near Mumbai.
Both projects were awarded after inviting global tenders and following the procedures prescribed for the public private partnership (PPP) projects. But at the crucial stage of execution, they collapsed, exposing fault-lines in the Government’s port privatisation policy. Besides the direct losses to the ports, the failure of these projects to take off will have a cascading impact on the entire port sector.
In fact, in both these cases, the bidders chosen for setting up the projects were experienced international players with proven track record. Then, what went wrong?
Double trouble
In the case of Ennore Port, the company, Bay of Bengal Gateway Terminals, that was set up to execute the project failed to tie-up funds for the project, even after three extended deadlines that ended on September 28. The concession agreement for the 1.5 million TEUs terminal was signed in August 2010, after the consortium agreed to share 39.99 per cent revenue with the Government. Following the delay, the port trust decided to cancel the bid and encash the Rs 14 crore bank guarantee provided by the consortium.
In the case of JNPT, the story is slightly different. The bidder — a consortium of PSA, the global port operator, and its local partner ABG Ports — failed to sign the concession agreement even after two extended deadlines, which ended on August 30, 2012, nearly a year after the letter of award for the project, was issued on September 26, 2011.
The consortium was chosen to set up the 4.8 million TEUs project after it emerged as the highest bidder agreeing to share 50.08 per cent of revenue. It was the highest revenue share ever offered by any PPP port project in the country.
Four months later in January, PSA backed out of a function convened to sign the concession agreement at the last moment, stating that it was unaware about the payment of stamp duty for registering the signed documents. Ever since, PSA kept on seeking more time to sign the deal.In the meantime, PSA parted ways with the local partner ABG, and asked for the port’s permission to take up the project alone. JNPT did not agree to that as it was not allowed under the tender conditions.
Finally, JNPT issued an ultimatum asking PSA to sign the deal by end of August. The Singapore Government-owned company did not bother. Frustrated by the delay, the port trust decided to tear up the letter of award and encash the bank guarantee of Rs 67 crore.
Short-term view
According to the London-based Eredene Capital, one of the partners in the consortium that bid for the Ennore project, the decision to withdraw from the project was taken in light of the changed economic outlook in India since the concession was granted — increased cost of local financing, depreciation of the Indian rupee and lower projected growth in container traffic.
To a great extent, the change in the macroeconomic situation in India is due to change in the world economic environment. In fact, India is less affected by global slowdown compared to many other countries. The lower growth in trade or cargo traffic due to macro economic changes could be temporary. Investors in long-term infrastructure projects, such as port terminals, should be taking into account such dynamic factors before finalising their price bids. So, it is surprising to hear that the Bay of Bengal Gateway Terminals did not realise the risk factors arising out of macroeconomic changes when it offered to share 40 per cent revenue from the Ennore project with the Government.
In the case of the JNPT project, there has been no official response as yet from PSA to the termination of its contract. An email sent by this correspondent to the spokesman of the Singapore firm seeking his views on the development received just a “no comment” reply.
A dominant speculation in the port circles has been that PSA overbid the project by offering to share more than 50 per cent of the revenue. The new management at PSA did not find it economical and wanted to wriggle out of the project.
PSA is the second largest container terminal operator in the world. It also operates two other container terminals in India — Chennai and Tuticorin — and holds stakes in two others. So, the Singapore firm was well aware of the JNPT project and its potential, before putting in its bid.
Massive loss
Whatever may be the reasons, it is clear that in both these cases bidders have backed out after winning the projects by bidding aggressively. Since the bid prices were attractive the port managements went out of their way to accommodate the bidders’ demand for more time. But it proved a futile exercise, wasting more time.
In the process, what the bidders lost is only their bid money, which is pittance for them. But the damage caused by them to the ports and the country is huge. It will take at least a couple of years for the ports to call for fresh bids. According to the PPP projects qualification rules, these bidders will not be allowed to bid for other projects for three years. Again, this is not a severe punishment.
Global investors are here for business, not for any charity. Why should the country’s trade, port users and its economy be made to suffer for their wrong calculations or judgement? If they made a mistake, let them pay for it.
If required, JNPT and Ennore port should seek legal recourse for compensation from PSA and Bay of Bengal consortium, respectively. Only such a step will send a clear message to bidders of the future projects that Indian port projects cannot be messed up with.
These developments also call for a review of the current policy of awarding projects on the basis of highest bid money. Infrastructure projects should not be treated as ventures for government to earn maximum revenue.