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Group 1 Aritra Basuroy Akhandal Mohanty Nikhil Almalkar Aravindh Sandeep Tripathy Ambica Prasad Patnaik PGP/14/015 PGP/14/063 PGP/14/099 PGP/14/107 PGP/14/114 PGP/14/192
handling over 95% of the total capacity. See Exhibit 2 for data on traffic handled by major ports. The major ports are under the jurisdiction of the Central Government whereas the non-major ones are under the State Governments. The Indian Ports Act, 1908 and the Major Port Trusts Act, 1963 provide the legal guidance for governing the sector. Policies are formulated by the Ministry of Shipping for governing the major ports while the minor ports are governed by the policies laid down by the respective State Governments nodal departments. Minor Ports The traffic at non-major ports has grown at an average rate of 13% in the past but slackened to 6.5% in 2007-08 and 2% in 2008-09. The non-major ports can help in alleviating the problem of congestion at the major ports and therein lay their importance. Four states in India, Gujarat, Andhra Pradesh, Goa and Maharashtra together accounted for 96% of the total cargo traffic handled by the non-major ports in India in 2008-09. Investments Investments made into the port sector under the Tenth Plan are shown in Exhibit 3a. During the tenth plan, about 4.86% of the allocated funds were utilized. The large shortfall has been mainly due to the failure of project formulation particularly in the case of the major ports. The projected investments as per the 11th plan have been shown in Exhibit 3b. Private sector participation in this sector is also being actively encouraged. In the last 10 years, the Government has approved 25 private sector participations for major ports. Most of the current projects where private collaboration is being sought are being implemented on a BOT basis under PPP mode. The capacity addition through private sector participation has been 102.3 MTPA.
bidding methodology. Hence the weak bid preparation from the government on account of euphoria resulted in cancellation of the first phase of the bid. The Second Round of Bidding After the GoAP realised its fault on account of weak bid preparation which resulted in highly speculative bids in the first phase, it appointed a reputed consultant to carry out the feasibility and procurement studies. The comprehensive feasibility study was prepared and this time around GoAP decided to take the bid international. The project development costs were initially borne by APIIC (Andhra Pradesh Industrial Infrastructure Competition). Thus the second round of international competitive bidding and developer was awarded the project and concession by GoAP in 2002. Even though the second round of bidding was completed and the project was awarded to the consortium led by DVS Raju it took two years from 2002 2004 to iron out various developmental issues continued to come up and were resolved. Even this more elaborate bidding process in the second phase, major agreement issues were not exhaustively deliberated during the pre-bid phase which resulted in long negotiations with the bidder after awarding the project. Almost 82 issues came out from the 390 clauses of draft concession agreement and all of them had to be resolved before achieving financial closure. Even after finalization of the concession agreement, various issues continued to plague the Gangavaram Port project. Several protests by the villagers turned violent as they were not happy with the R&R settlement package. Financial closure was achieved finally in 2005 and soon after the deal was awarded Asia-Pacific regions Infrastructure Deal of the Year by Thomsons Project Finance International. The process details have been provided in Exhibit 3c. Construction Phase and Current Status The construction of the port was completed in April 2008.The port has been operational since August, 2008 and has handled more than 8 MT of cargo as at August 2009, including cargo such as Coking Coal, Steam Coal, Iron Ore, Limestone, Bauxite, Urea, Slag, Steel, Raw Sugar, Scrap and Project Cargo. The port has handled the largest coal vessel to call at Indian Ports, Capesize vessel MV Ocean Dragon (151,049 DWT) and has achieved high cargo discharge rates (71,808 tonnes per day). Further Expansion Plans Keeping the future requirements of industry in mind, Gangavaram Port Master Plan has been designed with facilities to handle up to 300,000 DWT vessels, flexibility for phased development and room for expansion for a plan period of 50 years. The salient features of further expansion plans include: Plan for entire spectrum of cargos, with berths for handling dry bulk, other dry bulk, break bulk and container cargo with dedicated cargo centric zones Breakwaters to provide complete protection to berths from waves and swell to facilitate all weather, round the year port operations Navigation channel and harbour area providing adequate manoeuvring room for ships Total land area of 2800 acres for port facilities development
Extensive ancillary facilities and state-of-the-art utilities/services Adequate backup area for developing stack yards, covered storage sheds, tankages, container freight station etc. Rail and road access up to the stack yards, storage sheds and container yard Provision to provide value added services like Coal Blending Provision for Ship building and repair facilities Marine Oil Terminal consisting of Single Point Mooring system for handling VLCCs, sub-sea pipeline and Tank farm
In order to reinforce the expansion and development plans of the Gangavaram Port Limited, the state government has announced plans to construct Rs. 21 crore four lane flyover to the Gangavaram port.
Problem
DVS Raju and his partners find the project attractive, but the one thing that is making them wary about the prospects of the project: revenue-sharing with state government. For projects in which land is not bought from govt, revenue sharing is a common practice. But if they have to share revenues in lossmaking years, it increases the risk of the project substantially. Hence revenue-sharing agreement has to be carefully negotiated and if the profitability is at risk due to this agreement, a mechanism has to be thought out to make the project viable. The following questions crossed their minds. a) What kind of revenue-sharing agreement should they enter? b) How to negotiate with the govt. for the best terms? c) Are there any additional concessions they can ask for? This project is very crucial for the sponsors as this was their first green-field port project and a success in this project would provide them access to future projects as well. However, the success of any large infrastructure project hinges on the structure of the project that addresses the concerns of all associated parties: govt., partners and sponsors.
Possibilities
The port project is critical for all the parties involved. The sponsors are aware of the risks they are taking and the risk analysis shows the revenue sharing agreement to be one of the important issues. While project finance redistributes and allocates the risks to the parties that are best equipped to bear them, the revenue sharing exposes the partners to a potentially lower rate of return. The sponsors were thinking about all the social benefits the project is going to bring around in the region and the importance of the port to the prosperity. The revenues were exposed to uncertainties of the shipping business and the volatility of the global economic environment complicated the matters. The impact of sharing the revenues with government on the projects internal rate of return worried the sponsors. For the projects of this type the returns need to be commensurate with the risks, which tend to be on the higher side. The sensitivity of the rate of return to the revenues is tabled in Exhibit 9. Moreover the consultants employed by the consortium had an interesting real option POV take on the whole issue. They felt that the Govt., by scrapping the 1st bidding process and initiating a comprehensive feasibility analysis, was buying itself a call option on the real asset that the port was. Taking this analogy further, the option premium was considered to be the extra cost undertaken for this analysis and the revenue foregone owing to postponement of bid allotment; the time to expiry was the stipulated time before which results of 2nd bidding procedure needed to be announced; Strike price was the NPV predicted from the best alternative (say, calling for another round of bidding and then awarding the contract). So the Govt. by exercising this option would be giving the go-ahead nod to the project right after this 2nd bidding procedure. The contention of the consultants was that the Govt. had a lot to lose if they did not exercise this option. They had done significant number crunching to support their case. They felt that this insightful information was an important trump card that was held by the consortium and could be used cleverly while on the negotiating platform. The sponsors wondered whether the government will be willing to share the revenue uncertainty. One way to do that was to make the receipts contingent on profitability rather than revenues. The variability in the profits could be factored in the projections. The viability of the project hinged on its potential to meet the return requirements for the sponsors and the government. A suggestion was to share the revenues only in the years of profit. Exhibit 8 explains the outcomes of such an arrangement. The impact on the governments return from the revenues is tabled. Along with the social returns, the sponsors hoped these will be convincing enough for the government. The negotiations needed to highlight this aspect.
Exhibits
Exhibit 1: Share of Cargo (Major & minor ports)
Source: Position Paper on the Ports Sector in India; Dept. of Economic Affairs, Ministry of Finance, GoI
Source: Position Paper on the Ports Sector in India; Dept. of Economic Affairs, Ministry of Finance, GoI
Source: Position Paper on the Ports Sector in India; Dept. of Economic Affairs, Ministry of Finance, GoI
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Additional Expenses: a) Depreciation : 10% of net block b) Interest rate : 9% ( leverage 69% )
Revenue Share Govt IRR 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
32.47% 33.88% 35.24% 36.57% 37.86% 39.12% 40.35% 41.56% 42.74% 43.89% 45.02%