Analysing the economic viability of the SSCP from a shipping perspective on the basis of official reports

Analysing the economic viability of the SSCP from a shipping perspective on the basis of official reports – Part 7 by Capt. (Retd.) H. Balakrishnan, I.N.

Introduction

1. Over the past year (2007), much has been written and stated, in the media, about the viability or otherwise, of the SSCP. The statements have also highlighted the economic benefits that would accrue to the Southern districts of Tamil Nadu on account of the SSCP.
2. This paper analyses the economic viability of the SSCP, from a shipping perspective, on the basis of information contained in various ‘official documents’ and reports such as:
(a) The website of the Sethusamudram Corporation Ltd. (SCL)
(b) The ‘Report’ submitted by the ‘Committee of Eminent Persons’ to the Govt. of India. This ‘Report had formed the basis of the revised affidavit filed in the Supreme Court, by the Govt. of India.
(c) The ‘Information Memorandum of Sept. 2005’ prepared by the then UTI Bank (now Axis Bank), the lead Bank for arranging the financial loan for the execution of the Project.

Economic viability of the SSCP

SCL Website

3. The website, in addition to highlighting various USPs of the project, states: “Sethusamudram Ship Channel Project, which envisages digging a ship channel across the Palk Straits between India and Sri Lanka, is finally taking shape. The project will allow ships sailing between the East and West Coasts of India to have a straight passage through India’s territorial waters, instead of having to circumvent Sri Lanka. This will lead to a saving of upto 424 nautical miles (780 kms) and upto 30 hours in sailing time.” It further states: “The project will become self-sustaining over a period of time. According to conservative estimates, about 3055 vessels will be using the canal annually. This will inevitably go up further.”
4. The foregoing statement in the website implies that the SSCP is envisaged as a profitable undertaking which would lead to its self-sustenance in the years ahead.

Information Memorandum of the UTI Bank (now Axis Bank)

5. From this document, the annual expenditure for the SCL can be calculated. The main items forming this expenditure are summarized below.
6. Operation and Maintenance Costs (O&M Costs). From item 10.2 of the ‘Information Memorandum’, the budgeted figures for the O&M costs are as follows:


(a)Maintenance Costs
(Rs. in millions)
-- Maintenance of Vessel traffic Management Scheme (VTMS) 50
-- Maintenance dredging 200
(Note: For the 3rd and 4th year Maintenance Dredging has been
pegged at Rs. 170 million and from the 5th year onwards it
stabilizes at Rs. 140 million)
-- Civil Maintenance 10
-- Tugs and launches 100
-- Plant and Machinery 10

(b) Operation costs
-- Administration and staff costs 50
--VTMS 8.5
--Tugs and Launches 68
-- Plant and Machinery 20

(d) Contingency and Project Management costs
-- Contingencies 25.8
(Note: For the 3rd and 4th year, this has been pegged at
Rs. 24.3 million. From the 5th year onwards, it stabilizes at
Rs. 22.8 million).

7. Details of the financial loan. From Item 14 of the Information Memorandum, entitled ‘Indicative Term Sheet,’ the following are the details of the financial loan:--
(a) Rupee loan
-- Amount Rs. 4369 million
-- Interest rate 8%
-- Loan period 13 years
-- Moratorium period 5 years
-- Principal repayment 16 ‘equal installments’ from the end of 5 years

(b) US Dollar loan
-- Amount USD 100 milion
-- Interest rate Libor + 125 to 175 basis points = 5%
-- Loan period 20 years
-- Moratorium period 8 years
-- Principal repayment 24 ‘equal installments’ from the end of 8 years
(c) Zero coupon bonds
-- Amount Rs. 5826 million
-- Interest rate NIL
-- Loan period 30 years
-- Moratorium period 18 years
- Principal repayment 12 ‘annual instalments’ beginning from the end of 18 years

8. Profitability. A profit margin of 9% has been assumed for the project to build reserves.
9. Thus, the ‘Income to be generated’ by the SCL to become a self-sustaining undertaking, on an annual basis, is tabulated at Appendix A. The Zero Coupon Bonds have not been taken into account for the purposes of this analysis.
10. Ship tariff. As the SCL website anticipates an annual shipping traffic of 3055 ships to pass through the SSCP, the possible tariff to be levied on individual ships has been calculated and tabulated at Appendix A.

Time and fuel cost savings

11. The Report submitted by the ‘Committee of Eminent Persons’ (Chapter 8, para 8.2.5), gives the voyage distances between the ports of ‘Origin’ and ‘Destination’. The voyage speeds in the ‘open sea’ as also through the ‘SSCP’ have been given in this Report (Chapter 8, para 8.2.13).
12. On the basis of the foregoing, the following have been tabulated: (a) Fuel cost savings—Appendix B; (b) Time savings –-Appendix C

Analysis of the Appendices

13. The Report by the ‘Committee of Eminent Persons’, in Chapter 8, Para 8.2.7 states: “The approach followed by the consultants to propose tariff @ 75% of savings in one of the alternatives, may result in a scenario where the channel charges may be higher than the savings. As the tariff rate @50% of savings has been proposed, in the base case I.R.R., such a situation has been avoided. However, the savings to some ships will be more than 50%, while for some, it will be lower.”
14. In the light of the foregoing, comparison of the possible tariff to be levied on individual ships as calculated at Appendix A, and 50% the Fuel Cost Savings at Appendix B (column ‘q’), will clearly reveal that the SCL will NOT be able to recover its expenditure burden in the FIRST YEAR OF OPERATION ITSELF.
15. On the other hand, if the SCL decides on a higher tariff regime, as in the case of the major ports of India (e.g. Chennai Port Rs. 1.11 lakh/km for 7 kms of ‘pilotage’), then the fuel cost savings achieved by navigating through the SSCP, will be nullified for the shipping companies.
16. The ‘Time Savings’ tabulation at Appendix C debunks the claim of the SCL website of ‘Savings upto 30 hours in sailing time’. The same is the case in ‘Savings in Voyage distances’ also.
17. Cost escalation. A report in the economics daily ‘MINT’ of 25 Sept. 2007, entitled ‘Money runs dry for Sethusamudram’, stated the cost of the project has ‘Skyrocketed to at least 4000 crores, interest rates have crawled higher and old loan terms have lapsed.’ In a word, higher tariff regime for ships other than indicated at Appendix A.

Conclusion

18. In my earlier 6 Part analysis of the SSCP, I had concluded that the ‘SSCP just does not make any nautical sense.’
19. The present analysis, on the basis of official reports, has only served to reinforce the earlier conclusion.
20. The SSCP is a nautical folly.


Appendices:
(A) Income Generatin and Possible ship Tariff
(B) Fuel Cost Savings
(C) Time Savings

References:
(1) Sethusamudram Corporation Ltd. Website URL: www.sethusamudram.gov.in
(2) Report by the ‘Committee of Eminent Persons’
(3) Informatin Memorandum of the UTI Bank (Axis Bank) URL: http://sethusamudram.gov.in/Images/InfoMemo.doc

Appendix A,B,C at: http://www.scribd.com/doc/2867143/appendixabcsscp