Says, RFP for CICT was processed during recessionary times; but now ground realities have changed, with infrastructure in place and port business established; so, new terms for ECT are in order

Sri Lanka has blamed the Adani Group for the collapse of the tripartite memorandum of cooperation (MoC) signed in May 2019 with Japan and India to jointly develop the East Container Terminal (ECT) at Colombo Port, citing lack of flexibility shown by the Indian firm in “adhering to the key financial clauses” set by the island nation, according to Cabinet documents.

During negotiations held by Sri Lanka’s Cabinet Appointed Negotiation Committee (CANC) on January 27 and 28, Adani Ports and Special Economic Zone Ltd (APSEZ), which was nominated by the Indian government to develop the ECT, “insisted” that the same terms, conditions, rates, royalty and land lease payments to Sri Lanka Ports Authority (SLPA) set for the Colombo International Container Terminals Ltd (CICT) be made applicable to ECT too.

China’s state-run China Merchants Port Holdings Company Ltd holds 85 per cent stake in CICT, a joint venture terminal it runs with Sri Lanka Ports Authority (SLPA).

But, this demand of Adani was rejected by the CANC and endorsed by the Sri Lanka Cabinet on February 1.

“The Sri Lanka team explained (to Adani) that the request for proposal (RFP) for the CICT was processed in the recession period in 2009 and the breakwater was being constructed and the investor was expected to commence construction (of CICT) in parallel with the breakwater construction works,” according to a January 31 Cabinet memorandum prepared by Sri Lanka’s Ministry of Ports and Shipping.

“However, the present situation is very much improved with developed infrastructure ready for any new investor to come in (at ECT). Further, presently, the port business is established with proven records. Therefore, the same payment received by SLPA from CICT cannot be applied to ECT. The financial return expectfrom the ECT to SLPA shall be much higher than it is from CICT,” the Cabinet memorandum said.

The first round of negotiations held by CANC with Adani was inconclusive, and did not reach any agreement on the basic terms of the project, such as royalty, upfront payment, land lease payment to SLPA and exclusivity clauses.

“No flexibility was shown (by Adani) but (it) stressed to stick to the financial values given in the Build, Operate and Transfer (BOT) agreement for CICT,” the Cabinet memo said, referring to the talks held by CANC.

The tripartite memorandum of cooperation envisaged the formation of a terminal operating company 51 per cent owned by SLPA and 49 per cent by Indian and Japanese entities.

Although “the MoC indicates the ECT to be developed on a loan provided by the Japanese government to SLPA, the present government has decided to develop ECT as investment project (by) refrain(ing) from obtaining loans.”

The ECT comprise 1,320 metres of quay wall, terminal area of 76 hectares, 18-metre-deep berths and container stacking yard with annual capacity of 2.4 million twenty-foot equivalent units (TEUs). The SLPA has developed 440 metres of quay wall, 20 hectares yard area and connected facilities with a $80-million loan from the Bank of Ceylon.

During the negotiations held by CANC on January 27 and 28, the Sri Lankan side emphasised that the expenditure incurred by SLPA on the ECT would be recovered upfront from the Indian and Japanese investors.

However, APSEZ wanted the cost incurred by SLPA for the part-development of ECT to be “considered as the government’s share of the project”.

The CANC further said that the concession agreement for the ECT “will not offer anything more than what is already available to CICT”.

The CANC also sought a “golden shareholder status” to the government of Sri Lanka in the “strategic national interest”.

Adani sad that the project IRR and equity IRR were “negative”, as per its calculations based on values proposed by SLPA.

Thus, the minutes of the negotiations of CANC noted: “It is not fruitful to proceed with the negotiations on the proposal submitted by APSEZ as they were not flexible to adhere to key financial clauses.”

The Cabinet memo, therefore, recommended developing and operating ECT as a fully-owned container terminal of SLPA and to complete the terminal development works in three years.

The Ministry of Ports and Shipping also proposed to the Cabinet “to develop the West Container Terminal (WCT) in parallel with the ECT as a public, private partnership (PPP) project under BOT basis for a period of 35 years by a joint venture comprising SLPA and nominees of the government of India and Japan based on the framework used in developing the CICT”.

The CICT framework included BOT tenure of 35 years, one-time upfront payment, annual payment of land lease and royalty based on the containers handled at the terminal. Based on the CICT framework, it was decided by the then Sri Lankan government that this “model could be successfully used for development of container terminals, revisiting the payments to be received by SLPA based on comparative size of the terminal area and improved business opportunity in the port of Colombo”.

The WCT will have a 1,400-metre quay wall, water depth of 20 metres, terminal area of about 64 hectares with annual capacity of 2.6 million TEUs.

The WCT was being offered as an alternative to India and Japan as a “responsible government who honour international agreements reached between countries, the government of Sri Lanka is expected to be responsible in honouring such international agreements”.

While approving the proposal submitted by the Ministry of Ports and Shipping, the Cabinet also decided to set up a CANC and Project Committee to evaluate the proposal of the India-Japan team for the WCT.