How India’s first container hub terminal failed

The Basilica of Our Lady of Ransom in Kochi stands tall amid a sea of containers neatly stacked on the vast expanse of the narrow but vibrantly green island, Vallarpadam. The deity at the 16^th century shrine, whose legends are inextricably entwined with the illustrious Portuguese merchant, Vasco Da Gama, and rescuing myriad seamen and fishermen from perils, is a mute spectator to the slow-paced container transhipment terminal, built across the road.

The Kochi International Container Transhipment Terminal (ICTT), locally known as the Vallarpadam Terminal, has just completed a decade of operations on February 11, 2021. Built and operated by Dubai Ports World (DP World) after winning a long bidding process in 2007 and inaugurated by the then prime minister, Manmohan Singh, on February 11, 2011, it has remained just another container terminal, never transforming itself to what was envisaged by the policymakers and the industry—a transhipment terminal that takes Indian cargo directly to global markets.

Prior to the takeover by DP World, Cochin Port was handling container operations from the old Rajiv Gandhi Container Terminal (RGCT), at the nearby Willingdon Island, with two gantry cranes, four transfer cranes, and 452 employees. The annual capacity was 95,000 TEUs (means 20-ft. equivalent unit of container, in shipping parlance), but the port handled 165,000 TEUs annually a year before it handed over the reins to DP World. The available draught (depth in shipping channel and berth) was only 12.5 metre, and the annual maintenance cost was barely ₹30 crore-₹32 crore. Deeper draught allows much bigger ships to berth.

During the first six years, DP World operated container handling from the same old terminal but managed to ramp up the annual throughput to 3.15 lakh TEUs by 2011. That was achieved with the earlier available 12.5-metre draught.

Failing to deliver

The available data shows that the new terminal has not only failed to deliver the desired outcome, but also managed to put the Cochin Port Trust under severe financial strain. The most important condition to move to the new ICTT was 14.5-metre draught to be provided by the port. To maintain 14.5-metre draught, the port had to dredge the channel to 16 metre. While the entire capital dredging cost (₹325 crore) was borne by the central government, the job of annual maintenance dredging was on the port’s shoulders. According to the financial statements for the last 10 years (from 2010-11 to 2019-20), the port has spent ₹938.72 crore in maintenance dredging. The port also handed over 250 acres of land to DP World for ₹1 per acre annual lease.

In stark contrast, Cochin Port received ₹661.39 crore from DP World during the last one decade (amounting to 33.3% revenue share as per the concession agreement) on the total shareable revenue of ₹1,986.32 crore The gross revenue stood at ₹2,318.38 crore and an amount of ₹332 crore was kept aside by DP World as non-sharing revenue.

The port trust also earns vessel-related charges from ships but offers concessions to mother vessels amounting up to 86% of the tariff to ensure competitive rates with neighbouring container hubs. During the last decade, concessions granted in vessel-related charges by the port amounted to ₹461.97 crore.

The port trust provides tariff discounts only for mainline vessels that maintain some stringent conditions like minimum calls in a stipulated time frame and minimum number of containers during every voyage. The conditions exclude ships that make ad-hoc calls as well as the regular service players who fail to fulfil the stipulated conditions.

In the tenth year (2019-20), DP World handled around 6.2 lakh TEUs annually, way below the projected numbers. On completion of the third phase, the terminal was expected to handle 5.5 million TEUs annually. Everyone points an accusing finger to the absence of a clause that stipulated minimum guaranteed throughput (MGT), the sine qua non for the success of a private terminal.

“The new terminal has turned out to be suicidal for the port,” says P.M. Mohammed Haneefa, working president of the Cochin Port Staff Association.

The ICTT failed to transform itself into a hub terminal and handled just around 6% transhipment containers during the last year. Faced with the daunting task of ramping up volumes, DP Word cut down the annual target in 2016-17, to 4,71,300 TEUs from the previous year’s target of 9,11,011 TEUs, bringing it below the 4.78 lakh target quoted for 2010-11.

What went wrong?

Haneefa, who was on the board of trustees of the port trust, says the government spent over ₹1,900 crore for the terminal.

“All the basic infrastructure facilities such as four-lane road connectivity, rail connectivity with India’s longest rail bridge, and a deep draught channel [keeping 14.5 metre-draught meant the port had to maintain 15.95 metre depth] were provided. In addition, the port expended ₹125 crore that includes ₹98.5 crore sanctioned by the ministry as refundable loan for capital dredging for the project on viability gap funding,” he says, adding that ICTT had to spent only ₹750 crore for arranging the quay cranes and other handling equipment.

DP World claims that it has invested ₹1,200 crore in the project so far.

The unions representing workers and employees of Cochin Port Trust have now jointly sought the shipping ministry’s intervention to novate the 30-year licence agreement. They allege that the licence agreement is fraught with several inconsistencies that are detrimental to the port. They allege that DP World has lost interest in expanding the terminal capacity.

Praveen Joseph, CEO, DP World Cochin, disagrees.

“Despite major business disruptions in 2020, the terminal handled 6.31 lakh TEUs, maintaining the 2019 volumes, while other ports in South India registered an average degrowth of 11.2%,” Joseph told Fortune India in an e-mailed statement.

“ICTT has a current draught of 14.5 metre which can handle 9,000-10,000 TEUs vessels. There is a need to make the terminal draught to 16 metre-18 metre to accommodate large mother vessels and offer competitive marine charges. The neighbouring international transhipment hub enjoys pricing flexibility and offers more competitive rates compared to Indian ports,” he said.

“For [the] port to attract more mainline vessel calls, tariffs need to be comparable with competing international transhipment hubs,” Joseph said.

Shipping companies operating out of ICTT aver that the vessel-related charges (levied by Cochin Port) as well as container handling charges (by DP World) continue to be extremely high as compared to Colombo and other terminals in India. A senior line executive said the business is moving on because of the tariff concessions provided by the port. The facilities provided at Vallarpadam are adequate to handle 12 lakh TEUs, but the current utilisation is only about 50%.

Prakash Iyer, chairman, Cochin Port Users Forum, and regional manager of MCS, says the terminal needs a greater number of ships and bigger ships that connect destinations directly.

“While the port levies prohibitively high vessel-related charges, ICTT is among the terminals in India that levy the highest container-handling charges,” says Iyer.

For a 6,500-TEU ship that operates for the India East Coast Express (IEX) service that connects Vallarpadam with Mediterranean and European ports, Cochin Port levies around ₹55 lakh for a call, and gives a refund of around ₹40 lakh after three months, provided the consortium of shipping lines manage to fulfil the conditions. “Even the ₹15 lakh is much more what Colombo and Jebel Ali are charging,” he adds.

At ICTT, DP World charges around ₹13,000 for handling a 40-ft container (FEU) as compared to Tuticorin that charges nearly half. “Another big problem is handling empty containers. The terminal handles around 15,000 reefer TEUs annually, mostly seafood exports. But there are hardly any imports of refrigerated goods. Lines need to reposition empties in order to support the export of seafood from Kerala. The terminal charges the same amount for handling empties, making the industry less cost-effective,” says Iyer.

The shipping lines have told the port to reduce overall tariffs instead of handing out discounts. “Shipping companies do not want to wait for three months to get their money back,” says Iyer.

M. Krishnakumar, branch manager of Transworld Shipping Agencies in Kochi, says dredging costs make the vessel-related charges prohibitive. “For a 1,200 TEU ship, we pay ₹26 lakh when Colombo charges just around ₹3.3 lakh. Unless the government takes care of the dredging and absolves the industry from the burden, there is no future for Vallarpadam as a hub terminal,” he says.

“Containers from Tuticorin and Chennai go to Colombo for transhipment. It is much quicker as containers reach in 12 hours whereas Tuticorin-Cochin takes 18 hours by sea,” says Krishnakumar.

Iyer says there is no scarcity of cargo. “If a line starts a direct service to the U.S. East Coast, I can assure at least 1,000 TEUs from Vallarpadam for every voyage. Apart from Tirupur, Coimbatore, and other hinterlands of Tamil Nadu, we could also get cargo from Bengaluru and Mangaluru,” he adds.

Joseph claimed that ICTT, along with the port trust, has taken several initiatives to enhance trade from Cochin Port. “In January 2020, the terminal launched a regular weekly rail service to Bengaluru and has recorded a fivefold increase in rail volumes,” he said.

In January 2021, the terminal handled 71,543 TEUs, creating a record for monthly throughput since its inception. “This is because of the huge congestion at Colombo Port. In January, both MSC and Maersk Line made a few ad-hoc calls with bigger ships,” said an industry official.

Abraham Tharakan, the chairman of Kochi-based seafood exporter Amalgam Group, says the terminal could not strike gold even when the Colombo Port was in a big mess due to an unprecedented congestion. “ICTT is operating like a small terminal feeding other transhipment terminals in the region,” he said.

Joseph said from November 2020 till date, the terminal has handled more than 25 vessels to help trade due to port congestion issues at the neighbouring transhipment hub.

At present, the ICTT has only two mother vessels making regular calls—IEX Service and Wanhia’s China India Service (CS2). All the other services are small ships connecting to the hub ports in the region Colombo and Jebel Ali. There are around seven-eight regular services currently available with smaller ships of 1,000-2,500 TEU capacity, a far cry from the grand plans of attracting ships that carry more than 15,000 TEUs.

At the terminal, there are two berths having a total quay length of 650 metre and four rail-mounted quay cranes (RMQCs). Two small ships can berth simultaneously, but only one mother vessel can berth. “We do not know what will be the impact of the Adani-run Vizhinjam Port—when it becomes operational—on Vallarpadam. And on the flip side, Colombo is expanding capacity rapidly,” says Krishnakumar.

The fact is that Vallarpadam has failed miserably to compete with Colombo. The only benefit it brought to the industry is that the vessel turnaround time has reduced to less than 24 hours from the earlier two-three days at RGCT.

If the ICTT were to handle huge mother vessels (post-Panamax), the channel may have to be dredged further to 18.5 metre and more, which will require huge capex for capital dredging and subsequent annual maintenance dredging. The financially weak Cochin Port may not be able to shoulder it.

“India is a key market for DP World. We will successfully position India as a key transhipment and trading hub, with ICTT playing an important role in the same,” added Joseph.

Will the ICTT be able to navigate itself out of the choppy waters? Nobody has an answer.