SEMINAR ON SALVAGE SINKING COCHIN PORT

On 16th October 2013
Venue : EMS Town Hall, Ernakulam.
V.J.MATHEW, SENIOR ADVOCATE
VICE PRESIDENT, INDIAN MARITIME LAW ASSOCIATION, COMITE’ MARITIME INDIA
SALVAGE SINKING COCHIN PORT

EXECUTIVE SUMMARY Cochin Port was established by the Portuguese in the year 1503 AD at Calvetty on territory gifted by Maharaja of Cochin. In 1920 Sr.Robert Bristo was nominated for developing a new modern port in Cochin. From his experience as the Engineer who constructed Suize Canal he took charge an the Chief Engineer and started developing a modern Cochin Port . Ever since and until the end of 2004, the Port grew to meet the needs of traders of the hinterland. With improvement in road and rail connectivity, the Port’s hinterland at times stretched to Andhra Pradesh and beyond to service export of Darjeeling tea that used to arrive overland to Cochin Port.

In the year 2004 Cochin Port Trust decided to go into the business of transhipment, which is a port service sold to mainline ship operators. The Port’s focus was hitherto servicing trade from its hinterland. The year 2005 heralded a new beginning. The Port set its course to become a business enterprise selling transhipment service to global shipping conglomerates. It was an ambitious plan to lift immediately yearly traffic volume from 2 lac containers to 10 lac containers and in due course to reach 30 lac containers per year. The travails of this change of direction and its aftermath is the subject of this seminar. The objective is not to find faults. The seminar’s objective is to build consensus on what needs to be done to salvage the Port from the business plan that had gone away.

BRIEF HISTORY OF MAJOR PORTS IN INDIA. Ports operate on foreshore that is recognised as public assets to which public has right of access. Governance of foreshore and regulating public rights on foreshore required creation of public trust. That was how public trust began to be established initially for Bombay Port in 1873 following which, Bombay Port Trust Act in 1879 was enacted. Similar enactments followed, i.e., for Calcutta Port in 1890; and for Madras Port in 1905. In 1963, all ports previously established were brought within the purview Major Port Trusts Act, 1963. This Act also enabled vesting of foreshore by creating public trust.

COCHIN PORT Pursuant to coming into force of Major Port Trusts Act, 1963 the governance of the Port of Cochin was vested with Board of Trustees in the year 1964, prior to which the Port was administered directly by the Central Government as per Madras Outports and Landing Fees Act, 1885.

Ever since the Portuguese established Cochin Port at Calvetty in 1503 AD on territory gifted by the Maharaja of Cochin, the port steadily grew to meet the needs of traffic, predominantly of merchandise trade from the hinterland. It is in 1920 Sr.Robert Bristow was appointed by the British Government for constructing a new modern Cochin Port . before starting the construction at the instance of Kochi Maharaja , British Government appointed Sr.John Vwhoonfs Barry Leyester at Partners, London to study scientifically how to develop and construct the Port and doing dredging work. In 1918 January 18th they submitted a report to the Diwan wherein it is stated about the scientific method for doing the dredging without affecting the beach and the land in Fort Cochin, Vypin and Kannamaly. The report as also clearly stated that 2 miles groynes has to be constructed both at Fort Cochin and Vypin to avoid land sliding . unfortunately t hese scientific methods was never implemented by the subsequent port authorities . Due to unscientific dredging beaches on the side of Fort Cochin and Vypin completely got eroded and resulting in the present pathetic condition of the Mahatma Gandhi Fort Cochin Beach. It is by the end of 1970’s contaninerized cargo and container vessel started coming to India. In 1970’s and 1980’s Cochin Port was one of the busiest port in India. Mattanchery Wharf handled bulk cargo vessels , including fertilizer’s and coal. The Ernakulam Wharf , later became a container terminal handling containers . being a natural harbour in the mouth of Arabian Sea and Vembanad lake 24 hrs. dredging was required to maintain the minimum debth of 10 to 11 meters. In the year 2004 specialisedcontainer berth - Rajiv Gandhi Container Terminal (RGCT) handled traffic of approx. 2 lac TEUs of hinterland traffic inclusive of 0.5 lac TEUs of coastal container traffic. This RGCT terminal has the potential to meet traffic needs for handling about 5 lac containers, even when the terminal and port being operated by the Cochin Port Trust directly.ß. The hinterland traffic volume is expected to reach 5 lac TEU by the year 2019.

TRANSITION FROM SERVICING TRADE TO THE BUSINESS OF TRANSHIPMENT The port’s main focus of service from the beginning to until 2004 was to service overseas trade in goods generated by the Port’s hinterland, which at times stretched to Andhra Pradesh and beyond to service export of Darjeeling tea that used to arrive overland to Cochin Port. Servicing hinterland traffic is exactly the function of a port vested as per Major Port Trusts Act.

However, in 2004, Cochin Port Trust conceived an ambitious plan to enter into business of international container transhipment. The business prospects as conceived by the Port Trust was that about 30 lac EXIM containers comprising of India’s inbound and outbound traffic of containers were being transshipped at Colombo Port in 2004. Cochin Port is ideally located in the midst of the maritime highway and has equal locational advantage compared to Colombo Port. Yet Cochin Port handles only negligible volume of transhipment. It was therefore conceived that Cochin Port could immediately attract at least one-third of this traffic that was being handled at Colombo – i.e., about 10 lac containers if container terminal operations at Cochin Port were entrusted to a globally competent container terminal operator. Transhipmentbeing a commercial service sold to mainline ship operators, it is characteristically distinct from servicing captive hinterland traffic offered by hinterland’s traders.

GLOBAL DEALS – MERGERS AND ACQUISITIONS The search for a strategic partner to implement Cochin Port’s container terminal project was done through open competitive bidding process. The process narrowed down to two significantly interested parties. They were (1) APM Terminals which belong to Maersk – the world leader in container shipping service and (2) Dubai based DP World[1], which was nursing ambition to establish its global presence in container terminal operation. While APM Terminals refrained from submitting valid financial bid to Cochin Port Trust, DP World submitted financial bid offering 33.300 percent of gross revenue as royalty payable to Cochin Port Trust.

In retrospect, it is evident that Maersk and DP World at that time was building cooperative business relationship to mutual advantage. While Maersk was negotiating to acquire shipping business of P & O Nedlloyd, Maersk was also simultaneously letting DP World to acquire container terminals of P & O Ports world-wide including of several Indian ports and of Colombo Port. Maersk accomplished the acquisition of P & O Nedlloyd on August 13 2005. DP World’s acquisition of P & O Ports container terminals world-wide encountered procedural hurdle consequent to concern regarding security of US ports. The deal was accomplished in March 2006.

THE BUSINESS PLAN OF PUBLIC - PRIVATE PARTNERSHIP IN COCHIN PORT When the Cochin Port Trust decided to hand over the RGCT to DP World, the understanding with DP World was that they would initially operate, RGCT and turn RGCT into a transhipment terminal from 2006 onwards and thereafter shift operations to Vallarpadam, where DP World is to build, in phased manner, over a period of 30 years, three terminals to achieve a projected traffic 30 lac TEUs. The business plan was to immediately raise annual throughput of foreign trade traffic of Cochin Port from 1.5 lac containers to 10 lac containers and to reach in due course to 30 lac containers per year.

KEY ELEMENTS OF PARTNERSHIP Central Government to invest about Rs 1,700 crores for dredging approach channel / berth basin and for road / rail connectivity to the Port. Ship related charge, viz., port dues, berth hire and pilotage will be levied by the Port Trust on ships. The revenue generated from these items would enable the Port Trust to cover increased maintenance cost of dredging to 14.5 metredepth.

DP World to invest Rs 700 crores to build 600 metrewharf at Vallarpadam and to equip it for handling yearly traffic volume of 10 lac containers, to begin with. Two more similar terminals have to be built to meet growing needs of traffic in phased manner during next 20 years. Cargo related charges such as for usage of gantry cranes, wharfage for containers, and ground rent for containers, use of prime mover and chassis, shifting / transfer of containers etc. will be levied and collected by DP World. 33.300 percent of gross revenue collected by DP World to be given to the Port Trust as royalty. The balance 66.700 percent of gross revenue is to cover return on DP World’s investment and operating expense and overheads.

A three-fold increase in volume of container traffic exclusive of coastal containers, i.e., 4.5 lac TEUs of traffic was expected within a year of operation of RGCT by DP World. Though only one-third of the revenue from cargo related charges would be received as royalty from DP World, the Port Trust’s finance would not be affected as there would be threefold increase in volume of traffic, thus warding off any decline in quantum of revenue

Coastal containers consisting of domestic trade would continue to be handled by the Port Trust and this traffic does not entail transhipment. Additionally, domestic trade is outside the scope of SEZ where transhipment terminal of DP World was to be set up. Hence coastal ships were excluded from the business plan for transhipment.

CRACKS IN BUSINESS PLAN Cracks in business plan became evident prior to signing of partnership agreement termed as LicenceAgreement. Though DP World submitted financial bid offering 33.300 per cent of gross revenue as royalty to the Port Trust, the Company refused to sign the LicenceAgreement on receipt of letter of intent from the Port Trust. The draft LicenceAgreement issued to qualified bidders by the Port Trust in the form of Request for Proposal (RFP) was the basis for inviting financial bids from qualified bidders. However, DP World responded to the letter of intent by submitting an alternative draft LicenceAgreement to the Port Trust. Strangely the process here is being made topsy-turvy. Instead of the Cochin Port Trust setting the terms of Licence, here DP World arrogated to dictate terms of Licence to Cochin Port Trust. Thereupon Cochin Port Trust compiled a statement listing how 21 clauses contained in DP World’s revised draft unilateral Licence Agreement differed from original draft Licence Agreement given to qualified bidders as per RFP. Eventually Cochin Port Trust for obvious reasons signed on the Revised draft unilateral Licence Agreement submitted by DP World, which is totally against the interest of the Cochin Port Trust.

WHAT WENT WRONG ? The Port Trust overlooked to perceive that cracks were developing in the business plan. In retrospect, as mentioned earlier, it is evident that Maersk’s APM Terminals was letting DP World to win Cochin Port’s project. Having won the award, DP World chose to set its terms of partnership as other interested bidders had already been edged out. Strangely, Cochin Port Trust clung on to transhipment project more as fixation than as any sensible business plan. As DP World failed to sign the Licence Agreement and refused to accept the award, the Port Trust as per normal bidding process should have forfeited the security deposit and taken other appropriate action. Instead the Port Trust accepted DP World’s terms for partnership, due to various pressures and obvious reasons.

This unguarded step led to a succession of several others as the partnership progressed. At each point the failure to stick to business plan aggravated financial difficulties for the Port Trust. By signing a unilateral license agreement dictated by DP World the Port Trust had taken over entire burden and liability to conduct 24 hrs. 360 days dredging in the Vallarpadam Terminal area as well as the channel. The Table below lists some of them.