Almost an year after the award a letter of intent (LoI) to P&O of Australia for the construction of the Vadhavan Port, the project is faced with a series of pre-construction risks.
This port will be one of the largest ports on the west coast, much larger than Mumbai port, with a cargo handling capacity of about 250 million tonnes and a wharf length of 10,000 metres and a draft of 15 metres. The wharf is where the ships are berthed and the draft refers to the depth available.
Given the technical specifications, the port is capable of handling ultra-large crude carriers. The port will be capable of berthing vessels of 350,000 dead weight tonnes. Such vessels are currently anchored outside the harbour area and mid-sea cargo transhipment is undertaken to smaller vessels, increasing the cost of cargo handling.
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Among the major risks faced by the project is the opposition from environmental activists who argue that there can be considerable damage to the marine biodiversity of the region, and the delay in the acquisition of land. The opposition to the project comes even after an environmental clearance given to the project.
This project is expected to cost about $1 billion, with the bulk of the investment coming in the form of foreign currency, both in equity and in debt. This project is being worked out on build own operate and transfer (BOOT) basis, which gives the project operators a 30-year concession period and to be extended by another 20 years. Accordingly this method confers certain rights on the project operators for development of associated projects. But the promoters are yet to tie up their finances.
The project can achieve financial closure only after the elimination of pre-construction risks.
Current indications are that the port will have a debt-equity ratio of 3:2. About 11 per cent of the equity is expected from the state government, the remaining portion from the promoters, P&O Ports. P&O is already in the prices of implementing a container handling facility at the Jawaharlal Nehru Port Trust at a cost of $195 million.
The Maharashtra government is also expected to invest in creating port connectivity by way of roads and rail links. The road is expected to be done through a build own lease and transfer (BOLT) basis through the Maharashtra State Road Development Corporation and is expected to cost about Rs 1,200 crore. The cost recovery for the road is to be done through a cargo cess. The cess will be levied at the rate of Rs 3 per tonne of cargo throughput.
Getting into port project through greenfield ventures is attractive and foreign currency funding is also not likely to be a major problem for the ports. This is because traditionally ports have two core cash flow streams _ vessel charges and cargo handling charges. Since the entire earnings from vessel charges are in the form of foreign currency, there are no currency fluctuation risk on the debt component.