Adani’s Vizhinjam port still mired in controversy after inquiry into CAG report

22 October 2018
Construction of Adani's Vizhinjam International Seaport, proposed to be set up along the southwest coast of Kerala near the state capital Thiruvananthapuram, is currently running behind schedule and will miss the Phase 1 deadline of December 2019.
S Gopakumar/The Hindu

In August 2015, the Kerala government and Adani Group signed an agreement for the Vizhinjam International Deepwater Seaport Project close to the state’s capital. The agreement soon ran into controversy after the Comptroller and Auditor General released a highly critical report, in May 2017, questioning the project’s financials and the manner in which it was awarded. Two months later, the state government constituted a three-member commission to find out “the persons responsible for taking decisions against the interest of the state ... as reported by the CAG.” For almost a year, the commission heard submissions, counter-submissions and received affidavits from environmentalists, government officials and Adani’s representatives, in relation to the CAG’s findings. However, in an unusual move, just before its final hearing, the commission’s mandate was inexplicably changed. The commission was now asked to explore whether the CAG report in itself had any merit.

The CAG report claimed that the terms of the agreement between the state government and Adani resulted in undue gain to the private partner at the state’s expense. The three-member commission, headed by a retired Kerala High Court judge CN Ramachandran Nair, was initially constituted to assign responsibility and suggest legal action against the guilty and procedures to make good the loss sustained by the state. On 18 July this year, one week before its final hearing, the commission’s terms of reference, or ToR, were modified. The changed ToR was not made public even after the hearing concluded, depriving interested members of the public an opportunity to raise their concerns about the project. The commission is slated to submit its report in January 2019.

In its May report last year, the CAG had raised serious questions about the circumstances that led to the Adani Group emerging as the lone bidder for the Rs 7,525-crore project. According to the CAG, Vizhinjam International Seaport Limited, or VISL, a company fully-owned by the Kerala government, changed the entire structure of the project arbitrarily, in the middle of the bidding process. The state government had justified this claiming that it adopted the Planning Commission’s Model Concession Agreement, or MCA, to make the project attractive to private bidders. The MCA is the central government’s template for private-public partnerships, or PPP, in port projects. However, during the course of the judicial inquiry, James Mathew, former IT Consultant to the state government, provided a detailed statement to the commission questioning the legitimacy and adoption of the MCA. Additionally, the CAG also observed that the final Concession Agreement did not comply with the MCA in entirety. The CAG’s report states that the state government “was mixing and matching clauses as per convenience, all of which resulted in providing additional benefits to the concessionaire”—the Adani Group.

According to the report, aspects of the Concession Agreement, such as extension of concession period and commercial real estate development, accrued massive benefits to Adani at the state’s expense. The excess benefit to the Adani Group from the extension of the concession period alone was estimated to the tune of Rs 29,000 crore, even as there was no commensurate advantage to the state. Despite the Kerala government funding 67 percent of the project, the CAG noted that “the interests of state government were not protected adequately while drawing up the concession agreement.” It concluded that the “technical and financial estimates prepared by the external consultants were not scrutinised with due diligence resulting in inflation of cost estimates,” and heavy subsidies were written into the agreement favouring Adani, all at the cost of public exchequer.

The Vizhinjam project, proposed to be set up along the southwest coast of Kerala near the state capital Thiruvananthapuram, has been in troubled waters since its inception. In the pipeline for 20 years, initial attempts to execute the project failed as serious concerns were raised about the necessity, economic feasibility and environmental impact of the project. Finally, in November 2013, the Kerala government approved a new model, which required the least state investment, prepared by the technical consultant AECOM India. Under this model, known as the “landlord port model,” VISL would be responsible for land procurement, external infrastructure and construction of the breakwater, while dredging, reclamation of land and construction and operations of the port would be handled by a private partner. This PPP was proposed on a design, build, finance, operate and transfer (DBFOT) basis.

Accordingly, in December 2013, VISL issued two global tenders—one for a PPP concessionaire and the second for an engineering, procurement and construction (EPC) contractor for the breakwater and external infrastructure. Five applicants were shortlisted at this request-for-qualification (RFQ) stage. At this time, the total project cost was pegged at Rs 3,900 crore, excluding the EPC work, which was pegged at Rs 767 crore. However, when the request for proposal (RFP) for the project was issued, on 12 May 2014, not only had the project cost been hiked to Rs 4,089 crore, but the second tender had been cancelled.

The state government had decided to include EPC work as “funded works” within the PPP tender. The funded works were pegged at Rs 1,210 crore, which was revised to Rs 1,463 crore in April 2015—almost double of the initial EPC cost. The CAG could find no justification for this hike despite accounting for exchange rate fluctuations, noting that merging the tender meant the government “could not assess the market rate for executing the work.” Mathew also pointed out that scrapping the EPC bid meant that eventually “work worth Rs 1,463 core was awarded without a tender.”

The final revision of the EPC cost estimates was done by an external financial consultant, Ernst & Young (E&Y), which was brought on board in February 2014. All subsequent financial viability estimates for the project were carried out by E&Y. Notably, the financial consultancy carried out viability studies only for the private partner’s investment, but not for the state.

In addition to the merged tenders, the Draft Concession Agreement, or DCA, that was issued with the RFP also introduced major changes to the project structure. These included changes to the basic structure to a combination of landlord and private services model (funded works), an extension of the concession period, introduction of commercial and residential real estate development, a provision enabling Adani to mortgage assets including land to finance the project, and an extension of deadline to reach the estimated capacity of the port. The CAG noted that the failure to include these provisions at the RFQ stage gave a huge and “unfair advantage” to the qualified bidders. In light of these basic structural changes, the CAG’s report states that the entire tendering process should have been cancelled and fresh global tenders invited.

VISL justified the introduction of extensive changes in the DCA claiming that they were based on the Planning Commission’s MCA for state ports, which first introduced the concept of “funded works.” However, Mathew stated in his submission to the commission that at the time the DCA was moved from the landlord port model to the MCA, the so-called MCA did not even exist. He said the MCA for state ports was ratified by the state government on 12 May 2014, the same day VISL released the RFP with the new specifications.

He further submitted that the external consultants—E&Y and HSA Advocates—were brought in without any due processes. According to Mathew, on 25 March 2014, while the state government was still drafting the MCA, the external consultants made a detailed presentation on the MCA to the Empowered Committee overseeing the Vizhinjam project. It remains to be seen how a private audit firm had complete and detailed access to a government document which was apparently still in the drafting stage.

Mathew also alleges that Gajendra Haldea, a former Planning Commission Principal Advisor (Infrastructure), who drafted the MCA, worked to promote Adani’s interests. He states that the MCA by Haldea was “just a propellant for planting these give-aways to the DCA—a propellant for pecuniary gain to the private player and pecuniary loss to the public exchequer.” Since the Vizhinjam port is a minor state port, Mathew stated to the commission, the Kerala government was under no compulsion to drop its original structure and adopt the MCA. The CAG also seems to support this claim while observing that “it was not mandatory for GoK”—Government of Kerala—“to adopt it.”

Haldea told me that the Planning Commission republished all its documents in April 2014, but that it did not mean that they were originally published that year. However, this contradicts the minutes of a May 2015 meeting of the Empowered Committee, which states, “In February 2014, Planning Commission introduced the concept of ‘funded works’ in the Model Concession Agreement (MCA) for state ports being prepared by the commission then.” According to the Empowered Committee, the funded-works concept was introduced to avoid “disputes on engagement of different agencies for work of same project,” which would affect the timely completion of the project.

Three out of five applicants—Malaysia-based SREI-OHL consortium, Adani Ports and Essar Ports—were shortlisted at the RFP stage. On 23 September 2014, SREI wrote a letter to VISL stating that they were “very much interested” in the project and requested two to three weeks to form a consortium with a new partner because OHL had opted out. The Empowered Committee did not respond. The minutes of the Empowered Committee’s meeting on 24 April 2015—the final date for expressing interest to submit bids against the RFP—records that the committee received SREI’s letter “only five fours prior to the submission time” even though the letter is dated 23 September 2014. Despite taking note of this discrepancy, the committee added that the request could not be considered. Referring to this, Mathew wrote in his statement to the commission: “This means from September 2014 to May 2015—till the bid was over—even the empowered committee was not informed of the request. We have to note that at this time when more concessions were being made based on the argument that there was only one bidder.”

According to the minutes of the Empowered Committee, in March 2015, the then Kerala chief minister and Congress leader, Oommen Chandy, who was also the chairman of VISL, had held talks with the chairpersons of the three bidding companies who bought the RFP. Chandy’s meetings were supposed to “instil confidence and to identify concerns if any for consideration within the legal framework of the bid process.” But Mathew stated before the commission that Chandy’s meeting was held only with Gautam Adani, the chairperson of the Adani Group. Mathew states, “All the above changes made to the project plan were done in consultation with Adani Ports and to benefit them. This was not a bid but just submission of the state’s assets to a private firm.”

On 16 May 2015, the then state secretary of Communist Party of India (Marxist) and the current chief minister, Pinarayi Vijayan, wrote on Facebook: “Chief Minister Oommen Chandy has made dubious interventions in this. It was reported that he has spoken to Adani over the phone. On 3 March 2015, he had met Gautam Adani at an MP’s house. What did they discuss that day? What did the CM had to say secretly to a company which had participated in the tender.”, VM Sudheeran, then state president of the Congress, also said, “The agreement was made to protect the company’s interests, not the state’s interests.” But in Chandy’s affidavit before the three-member commission, he states that “no negotiation was carried out with the successful bidder.”

Vijayan’s Facebook post also alleged that: “In the garb of fulfilling the development dreams of the Malayalees, the Adani Group is given land worth Rs 6,000 core through corruption in Vizhinjam project. The total cost of the project is estimated at Rs 2,400 crore, out of which Rs 1,600 crore could be borrowed from public financial institutions. To procure the remaining Rs 800 crore, land worth Rs 6,000 core is being given to Adani. This is part of a large conspiracy.”

The other participant Essar Ports was less enthusiastic about the bid—perhaps because at that time Adani Ports was in discussion with Essar group to acquire its port business. As a result, when it came to the final bidding stage in April 2015, Adani Ports was the lone bidder.

The bidder was to be selected based on the highest premium offered to the state or the lowest grant demanded. The maximum grant that could be demanded was capped at Rs 1,635 crore and Adani, as the lone bidder, quoted this amount. The tender was awarded in July 2015, and the concession agreement was signed in August 2015.

The circumstances surrounding Adani being awarded the bid—the timeline of the global tenders, the structural changes to the concession agreement, the adoption of the MCA, shortlisted bidders backing out or getting mysteriously sidelined, the role of the external consultants, and Chandy’s meeting—all suggest a concerted effort to steer the project Adani’s way. The CAG’s report points out that while the state changed the structure of the project midway—on the basis of the MCA—the final agreement with Adani incorporates provisions over and above the MCA. In fact, a detailed analysis of the financial clauses in the final Concession Agreement reveals an agreement heavily skewed in favour of Adani.

The concession period in a PPP project is the time allowed for exclusive rights and authority to construct, operate and maintain the project. It is ideally the minimum period required for collecting the required user fee so that the private partner could recover its investment with interest. According to the CAG, 30 years was the standard concession period for PPP projects and the International Finance Corporation—a World Bank consultancyrecommended the same for the Vizhinjam project. But in the final agreement, the concession period was extended to 40 years. “By allowing 10 years extra concession period, the concessionaire [Adani Ports] would be collecting additional revenue of Rs 29,217 crore,” the CAG’s report notes. It adds, “The extension also did not result in any reduction in the grant demanded by Adani.”

The CAG also noted that the concession period could be modified even if there is a shortfall of 2 percent, while the norm is to set this trigger at 10 percent. The report states that this trigger was not changed despite the Department of Economic Affair’s request. “The concessionaire stood to gain disproportionally both when the traffic increased and decreased.” According to the scenarios illustrated by CAG in the report, any deviation from the projected traffic and its accompanying riders would help Adani rake in benefits ranging from Rs 6,381 crore to Rs 24,620 crore.

The CAG also pointed out that as per the MCA, project assets were excluded from assets that could be mortgaged by the concessionaire to secure loans. In the final Concession Agreement, Adani was given the right to mortgage all assets based on the argument that “it would provide an additional layer of security to the lender.” The CAG observed that when one of the bidders had asked for such a modification in March 2015, the Empowered Committee had rejected the request.

According to the CAG, the modification was “contrary to the advice of the technical consultant and conferred upon the concessionaire the right to mortgage assets which includes land taken over by the Kerala government at a cost of Rs 548 crore.” When asked about this, Haldea reportedly told the commission that the clause was added to encourage banks to extend loan at a time when the country was facing economic recession. He also pointed out that the group had not mortgaged the land when it took a Rs 500-crore loan from a private bank.

Hareesh Vasudevan, an environmental activist and lawyer, had also submitted an affidavit before the commission. He drew their attention to the fact that the construction work for the Vizhinjam port project has just started and the company could mortgage the land to avail loans during a 15-year period. “The Commission had rightly pointed out that this would create a precedent for all port projects across India. Private companies would start demanding the right to mortgage land,” Vasudevan said. He told me that mortgaging of land is usually allowed only in power projects as they mostly involved barren land. “But in the case of port projects, it is the coastal land which involves multiple stakeholders including the fishing community. It is exempt from coastal regulatory zone guidelines only because it is government land.” When asked about this, Haldea told me, “Most of the land on which the port is being built is ‘no land’—it has to be reclaimed from the sea. It is more expensive and difficult than any work on the barren land.”

The CAG’s report also takes serious note of the introduction of port estate development—including commercial and residential projects unrelated to the port—in the final agreement signed. The report notes that despite the DEA granting approval for the project only subject to the use of real estate for port related activities, this condition has not been factored into the final agreement. The agreement is also ambiguous on what quantifies site area, whether it will include reclaimed land and when, if at all, Adani will return this real estate—to the tune of Rs 232 crore for 88.92 acres—to the government.

The CAG report states that despite the majority investment in the project, at the end of the 40-year concession period, the state will be in the red on its investment. The report adds that Adani would clock an internal rate of return—the rate of financial benefits on an investment—of 15 percent compared to the state’s 3.72 percent. Moreover, a termination clause was added into the agreement, which is not a part of the standard MCA. Vasudevan explained that usually when a bidder is withdrawing from a project due to “efflux of time”, the bidder pays money and cannot claim the termination clause. Efflux of time is the expiry of an agreement due to failed deadlines rather than any specific event. This practice is in line with the Ministry of Shipping’s September 2016 guidelines on concession agreements. However, Vasudevan pointed out that, “For this project alone the concessionaire gets paid for this.” As per Vizhinjam’s termination clause, after the 40-year period, Adani gets a payout of Rs 19,555 crore while the state’s net receipts will actually be a negative Rs 5,608 crore.

The CAG also noted that the state government accepted all of E&Y’s suggestions without any objections. “GoK/VISL at no time had analysed the state’s investment in the project ... Even the cost benefit analysis in the Environment Impact assessment was worked out for the investment by the private partner only.”

Haldea told me that the CAG’s calculation of the project’s financial viability “is factually incorrect.” He claimed that Thulaseedharan Pillai, a former audit officer who was a vocal critic of the project, was hired as a consultant by the CAG, and that he misguided the auditing body on many issues. When I asked him about CAG’s observations on deviations from the MCA in the final agreement, Haldea dismissed it as “a blatant lie.” He added: “This could be established beyond doubt on the basis of official documents. If the CAG report is found to be true, then the government should punish those responsible. Nobody is stopping them. But the truth is that there is no wrongdoing.”

During the hearing on 12 March 2018, the judicial commission, too, raised doubts about whether the CAG had been misled. The commission sounded sceptical about the report, and stated that the CAG should not have considered the port project as a public sector entity to evaluate the losses from the project. The commission reasoned that despite the state’s 67 percent investment, the project is a PPP and hence “There is procedural lapse in the CAG’s findings.” The commission also examined the report without any representation from the CAG. “We will not summon anyone, those who wish can appear before the commission,” said the commission on the final day of hearing, on 26 July.

The political winds around the project also seem to have changed direction. From terming the project a “conspiracy” in May 2015, the Left-front government led by Vijayan appears to have softened its position. In June 2016, a month after the Left Democratic Front led by CPI-M came to power, Vijayan said, “We are planning to complete the construction works within a time frame. We are concerned but we can’t drop the project. We need to finish the project fast. The only option available as of now is to expedite the construction works.”

Currently, Adani Ports is rushing work on the project and running behind its deadline. On 16 October 2018, the conglomerate informed the state government that it would not be able to meet its first deadline of 4 December 2019. Meanwhile, questions about the port’s future still haunt the project. Vijayan said that the judicial probe will not affect the project. “If the probe finds discrepancies in the project, the government will take stringent action. The government wants to complete this project in a manner that will benefit local people. The project cannot be abandoned on the basis of an allegation.” But according to the activists who challenged the process and the final agreement before the judicial commission, the abrupt changes in the terms of reference before the final hearing raises suspicions about the government’s promise of an independent probe.

Nileena MS is a reporting fellow with The Caravan. 

Keywords: Adani Group Adani Ports Kerala Thiruvananthapuram Vizhinjam Vizhinjam International Deepwater Seaport Project CAG Ernst & Young planning commission Model Concession Agreement Oommen Chandy Pinarayi Vijayan Gajendra Haldea
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