The pressure on the shipping ministry to achieve dredging commitments has just got higher, as only about half the planned target was completed in the last Five Year Plan. Private participation in dredging is relatively low, and DCI’s near-monopoly may be resulting in underperformance. With international players knocking down the doors with pricing and quality carrots, Manish Sharma and Lakshminarainan recommend how domestic dredgers can fare better.
Over the last decade, a tremendous increase in India’s trade volumes has created a large supply pressure on its seaside infrastructure. Despite its 7,000-km long coastline, India has very few truly deep water ports that can service large vessels that are increasingly plying the global routes. Several of our strategically important ports are situated in belts with high siltation and require regular maintenance dredging to keep them in operation. On the other hand, capital and maintenance dredging are among the weakest links in our maritime infrastructure development agenda.
Dredger building and operations are both global monopolies with a few yards and operators accounting for much of the global market. Unless there is adequate domestic competition, the consuming port is faced with a two-fold monopoly pricing. But the reality is that the Indian dredging industry is poorly developed with both public and private institutions operating with limited equipment capacity and severely outdated operational and servicing capabilities. Since 2004, several policies in various forms have either restricted the use of foreign players, or provided the domestic players with the Right of First Refusal to challenge their bids. Major ports were also free to nominate government-controlled Dredging Corporation of India (DCI) without a tendering process. While such policies have attempted to encourage local competition through protectionism, they have not had the desired effect, and instead have led to chronic under-performance.
Shortfall in achievement
A review of the 11th Plan performance by the Planning Commission Working Group puts things in perspective. India met only half of its planned overall target of 1,105 million cubic metres (mcm) between 2007 and 2012. The problem is especially acute in the case of major ports, where only 32 per cent of the targeted quantity was dredged in the plan period. While much of the blame can be ascribed to the delays in the underlying port/terminal projects, maintenance dredging targets too have been missed by more than 30 per cent. As India scrambles to meet this shortfall in the 12th Plan, it is faced with a fresh requirement of 1,200 mcm, with more than half expected to come from the major ports. As the Ministry of Shipping embarks on its ambitions to deepen major and hub port drafts to 14 m and more, the targets are bound to go higher, and the domestic capacity seems inadequate to meet them.
DCI, which is the biggest player in India is severely constrained to meet the huge demand due to several reasons. Modern dredging requirements place a heavy emphasis on cutting edge capacity, high degree of operational capability and highly trained manpower, none of which has been DCI’s strong points. Seven of its 10 Trailer Suction Hopper Dredgers (TSHD) are more than 30 years old and two of its three Cutter Suction Dredgers (CSD) are more than 20 years old. Their individual capacities are a fraction of what the latest dredgers in the market can provide, and even these capacities have been under-utilised by up to 30 per cent over a five-year period. Further, DCI’s operational and project management capabilities do not match that of foreign players, especially in complex projects. These challenges are further compounded by financial problems related to under-recoveries from port trusts and the government. While the equipment capacity issues are being addressed, DCI’s operational and financial issues will require significant time to be resolved.
Private failure
On the other hand, private companies are too small and fragmented to be able to compete effectively. A case in point is the recent failure of two private dredging companies in fulfilling obligations at the International Container Transshipment Terminal (ICTT) at Vallarpadam. The initial contract with a leading mid-sized player was scrapped after a default occurred on the project objective of attaining the required depth despite multiple extensions. The contract was then awarded to another well-recognised player, who after several months of effort, has admitted that the siltation volumes overwhelmed its capability to achieve the depth. The contract has now been given to DCI.
This highlights a systemic failure in planning and under-estimation of dredging efforts, while also showcasing the lack of preparedness of the private players. Some leading conglomerates operating minor ports have now begun to procure their own dredgers for both capital and maintenance dredging.
Mundra Ports and SEZ has invested in 13 dredgers to handle captive dredging operations. Others like Essar Ports and MARG Group are also self-sufficient in meeting their dredging needs. However, ownership of dredgers is prohibitively expensive, and unless justified by year-round utilisation on a commercial basis, it cannot be a long-term solution for all port operators. Further, commercial dredgers are also employed for servicing the needs of the oil and gas sector and for inland waterways, for which the captive route is not an option.
Clearly, the problems plaguing the sector are much deeper in their ramifications, warranting a much more holistic approach than currently offered, addressing the various dimensions of the issue: There is on the one hand an urgent and growing need for dredging activity, and on the other a need for building a sustainable domestic dredging industry that, in the long term, is both capable and competitive.
Defining the need and supply
There is a need for a nodal institution under the Ministry of Shipping on the lines of the Central Electricity Authority that is able to identify and prioritise key issues and required interventions, influence far-reaching policies, prescribe guidelines and standards and also to design equitable and fair contractual structures.
In the immediate future, dredging contracts need to be far more focused on the quality of results, competencies and efficient delivery. The recent capital dredging contract awarded by JNPT for deepening its navigation channel on an "assured depth" basis instead of using an item-rate contract is a step in the right direction. Port authorities should invest significant time in survey and studies that clearly establishes the work effort before inviting bids. This should be backed by a common methodology to ascertain the quality of work required and ultimately performed. Such parameters serve to outline the expectations clearly, and will be helpful to move the industry towards a quality-based approach. The Central Authority can provide the required support by providing planning and research methods as well through standards and guidelines.
In the short term, since there appears to be no option but to engage foreign players for guaranteeing success in large projects, the government must look at levelling the playing field. The preferential treatment for Indian dredgers and DCI should be relaxed for at least a few marquee projects, or for a prescribed time period. Since global construction activity has slumped in the wake of the ongoing economic developments, foreign players may be able to allocate sufficient dredging capacity to Indian ports at more affordable prices. During the recent bid for the JNPT channel navigation project, three of the four global majors submitted bids which were well within the port trust’s estimated project cost.
Promoting domestic business: Another issue that needs urgent attention from the government is the stretched finances of port authorities that constrain their ability to meet dredging costs. The government may also step in and provide appropriate capital and operational subsidies for large dredging projects like in several other countries. By raising the bar on the cost threshold, the port trusts may be able to focus better on achieving reliable results, sustainable over a longer term. This will improve the competitiveness of the ports, as the effect of high dredging costs on vessel-related charges is mitigated. Availability of subsidies will free the hands of port authorities to provide more water-tight guarantees on of their obligations as part of the licensing agreements, resulting in a more equitable contractual structure.
This, in turn will enhance the confidence of the private players when they are bidding for licensed terminals in port projects.
In the medium term, Indian dredging companies should be incentivised to step up their capabilities. The government can encourage private operators by addressing their critical capability gaps, employing a combination of policy and financial interventions. This may include for example, providing greater support for equipment procurement through adequate subsidies, exemption from taxes and duties, and also providing incubation support for adoption of innovative technologies and industry-leading practices.
There is a need to develop skilled manpower by investing in R&D and training centres. The Working Paper for the 12th Plan identified the need to develop trained manpower to compete on the global platform. To this effect, the paper emphasises on strengthening the existing All India Dredging Cadre training scheme and measures taken to retain the trained personnel.
In the long-term, the sustainability of the Indian dredging industry will be critically dependent on the ability to build quality dredgers in India. A promising trend in the last few years is the advent of several private shipyards along the Indian coastline, including those with a high degree of engineering expertise.
Since commercial shipbuilding has slumped in recent times, such shipyards are actively on the lookout for demand for specialised vessels from other industries like defence and offshore exploration.
The government should ensure that these yards are able to step up to the engineering challenges of making and repairing dredgers with indigenous technology by assigning at least a proportion of new builds and repairs to these yards.
In summary, there is a need to resolve the undamental issues plaguing the dredging industry, rather than adoption of quick-fix methods to treat the symptoms. This can be driven only by a sustainable policy framework that views this sector with a 10-year perspective, and recognises the multiple dimensions of the problem and addresses them through targeted interventions over the short, medium and long term.
Sharma is Executive Director and Lakshminarainan is Manager, Capital Projects and Infrastructure, PwC India.
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