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KRISHNAPATNAM PORT

THE ECONOMIC TIMES NEW DELHI FRIDAY 27 AUGUST 2010

In just its third year, this port is set to become the third largest handler of industrial commodities. Nidhi Nath Srinivas weighed anchor there and found a neat model to build a successful port.

Sheet Anchor

PORT OF CALL

Krishnapatnam has the maximum water depth on the east coast, with the ability to host large ships with a capacity of above 150,000 tonnes

Photos: D RAVINDER REDDY

M

MEETING POINT

OUNDS OF RED, POWDERY IRON-ORE CREATE A dust haze. A tanker sprinkles water on the roads. As the haze settles briefly, it reveals Krishnapatnam Port. On one side, beanpole cranes glint in the sunshine, their arms unloading restless ships that will sail away soon. On the other side, a stream of trucks, laden with coal, scurry on a four-lane highway. And then the haze returns. C Sasidhar, surveying the scene, doesn't mind the haze. Appearances don't bother the managing director of Krishnapatnam Port Company Limited (KPCL). "We are in the 'dirty' business," he smiles. Dirty refers to 'dry bulk cargo', or a palette of commodities: red for iron ore, black for coal and white for fertilisers. Krishnapatnam, in Andhra Pradesh (AP), is increasingly being used to export iron ore to China, and import coal and fertilisers from Australia, China and South-East Asia. Commissioned two years ago, Krishnapatnam is scaling the rankings of ports that handle these three commodities, which account for 40% of India's total port traffic. In 2009-10, its first full-year, Krishnapatnam was at number six. In 2010-11, if it maintains current volumes, and there's reason to believe it can, it will leapfrog to number three (see table). Zoom into Krishnapatnam, and it's a story of how to run a port, something that is never associated with large, government-run ports like Mumbai, Vishakhapatnam and Chennai. Zoom out of Krishnapatnam, and it's a story of how to build a port, something that private players, state governments

and the Central government ought to look at closely.

I

KRISHNAPATNAM SPECIALISES IN HANDLING DIRTY BULK CARGO: iron ore, coal and fertilisers. And it's located at a place where demand and supply have been made to converge. If it met the entire coal and palm oil needs of the 8 thermal power plants and 7 edible oil refineries coming up in its vicinity, the port would be the largest handler of dirty bulk cargo in India.

Haldia Paradip Mumbai Vishakapatnam Gangavaram Kakinada

Iron ore going to China

Krishnapatnam

Ennore Chennai Cochin Karaikal Tuticorin

Palm oil coming from Indonesia and Malaysia Coal and iron ore coming from Australia Fertilisers coming from Australia and China

N INDIA, THERE ARE TWO KINDS OF PORTS: 'major' and 'non-major'. Major ports are those that are basically run by the government. The advantage they offer is that of being close to commercial centres -- for example, Mumbai. On the flip side, they don't have the freedom to fix tariffs or raise funds, and have a poor service orientation. Worse, most of the 13 major ports have been operating at capacity for some years now. It's why, in the nineties, the government allowed 100% foreign investment in ports and encouraged states to involve the private sector. The build-operate-sharetransfer (BOST) model was chosen, where the state facilitated the port. The private player built it, owned and operated it for a certain number of years, and then transferred its shareholding and management to the government. These have come to be known as nonmajor ports. There are about 200 non-major ports, of which only one-fourth are operational, according to Crisil. Some have been conceived to meet the captive needs of their private owners. Some to service a large geography (Mundra in Gujarat, the largest private port). And then, there's Krishnapatnam, the first and largest private port on the east coast. It has been conceived --and supported by its home state -- around a new industrial cluster and upcoming special economic zone. It's a classic case of industry and port feeding off each other. In 1996, AP invited bids from private players to develop four ports, one of which was Krishnapatnam, in Nellore district. The Chandrababu Naidu government promised a thermal power plant in the vicinity, the coal imports for which would give the port captive business. The Natco Group, best known for Natco Pharma, was chosen to develop Krishnapatnam. Thus was formed KPCL. Work on the project started, but Natco ran into trouble and wanted out. The Hyderabad-based CVR Group, well known in the construction business, took over KPCL. CV Rao, a firstgeneration entrepreneur, and his two sons own the Rs 5,000 crore group. "We revised the masterplan to show how Krishnapatnam can become India's largest port," says Mr Sasidhar, one of the sons. It was cleared by YSR Reddy, the late chief minister, said to be close to CV Rao. KPCL also got permission to build two power plants and a 10,000-acre SEZ next to the port. Usually, state governments provide roads, water and power linkages, and help in acquiring land. But AP did more. It wooed companies in two industries -- thermal power and edible oil -- to Krishnapatnam. That all but clinched the business case for Krishnapatnam, which has so far seen an investment of Rs 1,500 crore.

production of 230 mn t in 2009-10 went to China. About 25% of this came from miners in Karnataka, for whom Krishnapatnam is an option. Some iron-ore mines at Bellary are exporting out of Krishnapatnam. Jindal Steel, Krishnapatnam's largest coal customer today, is building a steel plant in Karnataka, which will need 20 mt of coal a year. Although margins are lower in dry bulk cargo compared to container cargo, KPCL fancies the numbers in its natural catchment and the limitations of its competition. As does private equity firm 3i. Last year, it paid Rs 800 crore to acquire, in its words, a "minority holding" (exact stake not disclosed) in KPCL. Says Samir Kanabar, Partner-Infrastructure Practice, Ernst & Young: "Indian ports are seeing unprecedented interest from strategic buyers and funders."

CAPTIVE COAL

T

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EDIBLE OIL

Operational

Gemini Oils Adani Wilmar Saraiwaala Agri Refineries South India Edible Oils

THERMAL POWER PLANTS

Projects coming up in the vicinity of Krishnapatnam Capacity (mw) Expected Reliance UMPP 4,000 2013-14 Krishnapatnam Power 1,980 2012-13 Kineta Power 1,980 2010-11 Thermal Power Tech 1,980 2011-12 AP Genco 1,600 2010-11 Nelcast 1,320 2011-12 Meenakshi Group 540 2012-13 Simhapuri Power 540 2011-12

Finalised

Emami Group Foods, Fats & Fertilizers Louis Dreyfus

VOLUME PLAY

In 2009-10, its first full-year, Krishnapatnam leapfrogged 7 of the 13 government-run ports in dry bulk cargo handled (coal, iron ore and fertilisers). This year, Krishnapatnam is on target to handle 34 million tonnes and contend for the number 3 slot. Iron ore Paradip 15.6 Mormugao 36.5 Vizag 18.4 Chennai 11.5 Kolkata 9.5 Krishnapatnam 10.6 Ennore 1.2 New Mangalore 7.5 Kandla 0.1 Tuticorin 0.0 Mumbai 0.0 Cochin 0.0 JNPT 0.0 Fertiliser 3.9 0.2 4.3 1.1 0.6 0.9 0.0 1.7 5.9 1.8 0.3 1.4 0.0 Coal 25.0 5.0 11.6 10.1 9.1 3.9 10.5 1.3 2.0 5.9 3.4 0.4 0.0 Total 44.4 41.7 34.3 22.6 19.1 15.4 11.7 10.5 8.1 7.7 3.7 1.7 0.0

SUNIL

Figures in million tonnes; Note: While data for non-major ports is unavailable, Mundra is one of the big handlers of dry bulk cargo ; Source: Department of shipping

T WAS DEMAND-SUPPLY CONVERGENCE AT ITS best. Both these industries need large quantities of imported raw material. Coal (for the power plants) comes from Australia and Indonesia, and palm oil (for cooking oil refineries) comes from Indonesia and Malaysia. So, it makes sense for these companies to be close to the east coast. KPCL offered an efficient port, and AP complemented it with industry-friendly policies and land. "Industry will follow land," says Mr Sasidhar. KPCL itself has 6,400 acres -- about 25 sq km. This is thrice the land holding of neighbour Ennore and 10 times that of Chennai. KPCL can lease this land to companies or build storage space to handle 200 million tonnes (mt) of cargo. The production units in its backyard will provide Krishnapatnam captive business for virtually its entire capacity and cushion it from sudden changes like Karnataka's recent ban on iron-ore exports. "For a port to have an operating margin of above 65%, at least half its volumes should come from captive cargo," says the CEO of another private port. Today, the 20-km stretch between Nellore, the traditional rice bowl of AP, and Krishnapatnam resembles a giant construction site. In the past year, eight power companies have moved into the port's neighbourhood. When they are all ready, likely in three to five years, they will generate annually 14,000mw of electricity. To do so, they will need 60 million tonnes (mt) of coal a year, all imported through Krishnapatnam. That coal demand is about twice the current total capacity of 40 mt of Krishnapatnam; and it's 16 mn t more than the maximum dry bulk cargo -- coal, iron ore and fertiliser -- handled by a major port (Paradip) in 200910. That's just coal. Then, there's edible oil. There are eight edible oil refineries operational or under construction in Krishnapatnam (see map). Gemini Oils and Fats, one of whose shareholders is Ruchi Soya, is one of them. Its CEO, Pradeep Chaudhry, says Krishnapatnam's location provides an edge in India's biggest markets for palm oil, namely AP, Tamil Nadu and Karnataka. "I can sell threequarters of my output within a 400-km radius (of Krishnapatnam) at prices lower than that of oil coming through Kakinada. I can move competitively to Tamil Nadu, barely three hours away, as no refineries have come up there lately." Then, there's iron ore. Almost half of India's iron-ore

HE GOVERNMENT-RUN PORTS IN Krishnapatnam's vicinity -- Chennai, Ennore, Tuticorin, Kakinada and Vizag -- are all overworked and under-mechanised. Krishnapatnam is capitalising on their inability to process cargo quickly. Kribhco, for instance, has moved some of its fertiliser imports from Vizag and Kakinada to Krishnapatnam. Says P Pradeep K Reddy, deputy marketing manager, Kribhco: "We saved Rs 2 crore, as expenses (at Krishnapatnam) were low and it was economically viable." Besides space, Krishnapatnam offers five other reasons to customers, which the six major ports and 22 private ports on the east coast don't bundle as a package. One, size. Krishnapatnam, with a handling capacity of 40 mt a year, can service large customers, which most of the nonmajor ports can't. Two, it has a water depth of 16 metres, which enables it to host large ships of capacity of above 150,000 tonnes. By comparison, Chennai, which is 13 metres deep, maxes out at 70,000 tonnes. Three, because of space and mechanisation, it can turn around ships faster. It has 10 berths. At present, ships berth on arrival (no waiting). And shore cranes can handle up to 24,000 tonnes daily. By comparison, Chennai has 25 berths and ships end up waiting for two to five days; besides, it can do only 10,000 tonnes a day. Four, good road and rail connectivity to NH-5 and a broad-gauge rail line, both linking Chennai to Howrah. "Hinterland connectivity is critical," says Gagan Seksaria, associate director, transport and logistics practice, KPMG. "Nhava Sheva (in Maharashtra) is a classic example of world-class productivity on the water side limited by a weak land side." With the railways reluctant to ply wagons on routes where they have to travel empty one way, Krishnapatnam's cargo mix has helped: wagons that bring iron ore for export take back fertilisers and coal. Five, customer orientation. "Our strength is flexibility, continuous dialogue and quick decisions," says Mr Sasidhar. "They are always open to suggestions," says G Ravindranath, senior area manager at Iffco. "There is zero corruption, spillage and losses are significantly lower than other ports on the east coast." Krishnapatnam is working on a more efficient way of moving coal and palm oil to producers. For power producers, it is building 20-km-long conveyor belts that can move coal directly from a ship berth to plants. For edible oil plants, it is putting up a 16-inch pipeline connecting a liquid cargo berth to refineries. This will eliminate the trouble of loading and unloading trucks, saving time and money. Being next to the port helps producers. And being next to the producers helps the port. KPCL is planning a staggered expansion. Says Mr Sasidhar: "Banks want us to be cautious. We want to scale up gradually to avoid idle capacity dragging down the return on investment." KPCL is looking at a handling capacity of 50 mt next year, handling containers by 2013, and 42 berths by 2020.

Eight power plants in its vicinity, with capacity of 14,000 mw, will need 60 mt of coal a year

WELL CONNECTED

A national road highway is 20 km away and a broad-gauge rail line comes to its doorstep

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ON-MAJOR (READ, PRIVATE) PORTS ARE the future. According to Crisil, although private ports have a market share of 32%, they have grown twice as fast as major ports in the last 10 years (compounded annualised 15.6% versus 7.5%). In Krishnapatnam lies a model for private ports. It connects demand with supply, industry with port, rail and road with port, capital with business. Harmoniously and in a mutually beneficial manner. "Successful ports generally start on the back of captive cargo," says Seksaria. "It allows port management to ensure survival and build from there." The manner in which the CVR Group and AP have worked out Krishnapatnam, it skips survival and goes straight to building. That's a blueprint entrepreneurs and policymakers will have to work with. Says Rajeeva Sinha, director, Mundra Port & Special Economic Zone: "Given the lack of a comprehensive policy on port development and bureaucratic hassles, the main challenge before private ports is to put all the pieces of port development together into a full package." But it can't be done everywhere. Tamil Nadu is getting clogged, Karnataka doesn't seem interested. Says Seksaria: "Large ports have reason to come up in Maharashtra and Gujarat, driven mainly by the imported-coal power plants that are expected in northwest India. They can also come up along the mineralrich east coast." Maybe next to Krishnapatnam.

DIRECT TO PLANT

For power firms, it is building 20-km-long conveyor belts that can move coal from a ships to plants.

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