Takeaways from Kerala’s Vizhinjam port success story

Vizhinjam Port in Kerala, which was inaugurated a few weeks ago by Prime Minister Modi, marks an important step in the development of infrastructure in India. It is India’s first deep draft port, only 10 nautical miles away from the main east-west international shipping route. Several of the largest vessels from global shipping companies have already called at Vizhinjam including the MSC Turkiye, the largest container ship in the world, and the first time a ship of this size has docked anywhere in South Asia.

Earlier, no port in India could take the large container ships used today, which is why almost 70 % of the container traffic destined for India was sent to Colombo and other foreign ports for transshipment to India. This traffic can now come directly to Vizhinjam, saving 30-40 per cent in transport time, increasing port revenues and also stimulating local shipping to other ports.

The scope for developing Vizhinjam as a deep water port was known for several years, but plans were half-hearted. Oommen Chandy, as Kerala chief minister in 2011, appointed KM Chandrasekhar, one of the authors of this piece who had just retired as Cabinet Secretary, as Vice Chairman, Kerala State Planning Board. Chandy drove home the importance of the project.

Now Chandrasekhar, as Cabinet Secretary, had been fully aware of then Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, and author of this article, to develop infrastructure through public-private partnership (PPP). Recognising that infrastructure projects were often not sufficiently profitable initially, the Commission had developed a mechanism for offering a capital subsidy for these projects to incentivise private investors.

The Commission had set up a separate unit to deal with PPP projects under Gajendra Haldea, an IAS officer who had worked on PPPs in different sectors, and had acquired deep expertise in this area. Chandrasekhar advised the Kerala CM to write to Ahluwalia requesting Haldea’s services to help develop the Vizhinjam port on a PPP model. This was promptly agreed to, and Haldea began working on Vizhinjam, effectively on loan from the central government.

Haldea prepared a Model Concession Agreement (MCA) for Vizhinjam, based on bidding for a capital subsidy. The subsidy provided by the state government was supplemented by Viability Gap Funding (VGF) from the Centre, under a scheme which allowed the Centre to give 20 % of the approved capital cost for state government projects that met eligibility criteria. Haldea, who had conceptualised the VGF scheme, ensured the Concession agreement for Vizhinjam would make it eligible for the subsidy.

Following the 2014 general election, when PM Modi took office, there was initial concern whether the VGF for Vizhinjam would be made available — but then Finance Minister Arun Jaitley soon approved it, a good example of co-operative federalism at the political level.

A key requirement for a PPP is that the choice of concessionaire should be based on competitive bidding — in this case, there were five technically qualified bidders. As it happened, however, only Adani Ports, actually submitted a bid! Procurement guidelines do not rule out single bids if the bidding process is otherwise transparent but governments are understandably reluctant, since single bids are vulnerable to the charge of favouritism.

The issue was also complicated because the main Opposition party, the CPM, had opposed the project making the usual allegations of favouring private parties, crony capitalism, and disguised real estate development. The Catholic Church was also opposed on the grounds that it would disrupt fishermen livelihoods.

An Empowered Committee of state government officials considered all issues and recommended accepting the single bid. The Cabinet accepted this recommendation. It was a good example of boldness in decision-making, without which infrastructure projects can be interminably held up. The fact that the Model Concession agreement, and the clarity in distributing risks was completely in line with what the Central government was doing, encouraged this outcome.

Construction began at the end of 2015, but state elections were held in 2016 and the state government changed, with the CPM-led LDF, under CM Pinarayi Vijayan, taking office. The CPM had severely criticized the project earlier, when it was in the Opposition, but did not reverse the decision after coming into power. This was an important signal of continuity.

In a democracy, it is the job of the Opposition to oppose, but the system can only work if Opposition parties recognise that once they get into government, they should not mechanically reverse earlier decisions, as has happened in many states. The threat of such reversals greatly increases the perceived risks facing PPP projects and discourages good bidders, thereby jepoardising future PPPs.

A year later, the project ran into a new problem. A performance audit of several projects in Kerala by the Comptroller and Auditor General made several criticisms of the Vizhinjam project, many of which were a mechanical repetition of earlier Left criticism.

But the LDF government, to its credit, did not interrupt the project. Instead, it appointed a Judicial Commission to look into the issues raised. The Commission pointed out some minor procedural weaknesses, but did not raise any major problems. The state government decided to continue with the project, a major signal of policy continuity.

With the first phase successfully implemented, plans for expansion are already underway. Projected traffic is much larger than was originally expected and the concessionaire and state government have signed an agreement to increase capacity from one million TEUs at present to three million TEUs by 2028-29. This will involve an additional investment of ?10,000 crore across three phases.

The resources for this expansion will come entirely from the concessionaire, with no capital subsidy from the state government. The initial capital subsidy and successful implementation has made subsequent expansion self-sustaining. It is doubtful if the project had been implemented in public sector mode that an expansion would have been planned as quickly.

While Vizhinjam has got off to an excellent start, there are loose ends that call for attention.

— The railway and road connection to the port remains incomplete. Unless this is done, containers cannot be dispatched directly to inland destinations and the port will be limited to transferring containers to smaller vessels to be offloaded at other smaller ports. The road and rail links are crucial to derive the full benefits from the port.

— A new 77-km Outer Ring Road needs to be constructed from Vizhinjam to Navayikulam, initially as a four-lane highway expandable to six lanes, at an estimated cost of ?4,868 crore. This will help develop Vizhinjam as a city, an obvious objective now that a port has been established.

— Eight economic clusters are to be constructed along the corridor, including a logistics and industrial hub at Vizhinjam and a health tourism hub at Kovalam. These clusters should also be implemented as far as possible in PPP mode.

— Finally, customs procedures in Vizhinjam need to be reviewed to ensure that they come up to global standards.

These supporting steps will involve cooperation of Central agencies (eg Customs and Railways) and those in the state government. These problems need to be addressed on a priority basis to ensure the earliest possible realisation of benefits from the port.

Montek Singh Ahluwalia is former Deputy Chairman, Planning Commission and KM Chandrasekhar

is former Cabinet Secretary and Vice Chairman, Kerala Planning Board.

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