Friday, February 01, 2008

Sethu Samudram Shipping Canal Project: A economic Perspective

The Sethusamudram Ship Canal Project (SSCP) envisages the creation of a navigable canal from the Gulf of Mannar to the Bay of Bengal to facilitate movement of ships. The project documents claim that ships moving from the west coast to the east coast of India do not need to navigate around Sri Lanka but can use the channel to save 36 hours of shipping time and 570 nautical miles. One of the major Hyped claim is that it will save up to 30 hours of shipping time. Lets look at various aspects as told by several experts in their respective fileds:-

1. Security of Ships: Setu project a threat, says Coast Guard. The Indian Coast Guard (ICG) has said that the controversial Sethusamudram shipping canal project has “security implications” which have been “conveyed” to the government.

Addressing the media ahead of the 31st anniversary of the ICG, its Director-General Vice-Admiral Rusi Contractor said, “There are security implications because of the closeness of the India-Sri Lanka maritime boundary”.

I guess in such a Narrow channel all the ships would be a sitting duck for Pirates and LTTE

2. Long term Cost: The wind and waves bring in a large amount of silt and wash it ashore. The same thing is going to happen to the Sethu Samudram Canal. Marine scientists have identified five areas on the Indian coastline they call high-sinkage pits, and one of them happens to be the Palk Straits.

What is left unsaid by the Sethu Samudram authorities is that maintaining the 12 metre depth (of the channel) will entail round the year dredging. But this cost is not mentioned anywhere. It is estimated that 2 million cubic metres per annum of sand needs to be dredged, the total amount of maintenance dredging could in fact go up significantlydue to the fact that the Palk Bay is a sediment sink for the rivers of the southern peninsula as well as due to the action of
the sea on the coastline of Tamil Nadu.

3. Travel Time: The voyages that are used as reference points in the draft project report (DPR) start either at Kanyakumari or Tuticorin and move to the east coast. While this might be true for journeys that originate along the west coast of India, for other voyages, the choice of these starting points overstates the distance saved.

For voyages from other destinations, will save just 215 and 70 nautical miles respectively: significantly lower than what is stated in the DPR.

Details Available here

4. Reduction in Cost: The primary claim of the SSCP is that less time at sea will mean both lower time charter rates (to hire ships) and lower fuel expenses as less distance has to be covered. The reduced expenditure by using the canal can then be charged as a tariff by the SSCP. In dollar terms, the DPR hopes to charge up to 50 per cent of the calculated savings as a tariff for using the canal. The saving as calculated by the DPR for a 20,000 DWT ship will give a canal tariff of around $ 8,981. On average, non-coastal ships, that constitute 70 per cent of the projected users, will lose $ 4,992.1 if they use the canal at the current tariff structure. Many from the shipping industry opine that ships will go around Sri Lanka rather than have to go through a canal with draught restrictions and with a need for a pilot to embark and disembark from the ship. If on the other hand, the company charges the total savings made by the ship (around $ 4,000), the pre-tax internal rate of return (IRR) of the project falls to just 4.5 per cent. On the other hand, if the SSCP charges 50 per cent of the amount saved by these ships, the pre-tax IRR falls to just 2.6 per cent!

Details Available here

5. Lack of Support: For a project like the SSCP, that is to be completed by November 2008,5 it is time to ask the company why it has not been signing up customers to use the canal or published possible sea lanes around the canal. The focus has been proclamations on how the canal would be beneficial for ship users, but there is little evidence in terms of customers (especially foreign shipping lines). Despite appeals by the finance minister that the shipping industry shares the costs of building the canal, there have been no takers for this proposal. In fact, if it is, as many report, the fulfillment of a 100-year-old dream, why are there no shipping companies lining up outside the SSCP office waiting to sign contracts with the company?

6. Short Term Vision: The Suez and Panama Canals save ships thousands of miles, and that makes them profitable. Sethusamundaram is not remotely comparable. It is designed for small ships (the project documents talk of 20,000 DWT), whereas the Panama Canal takes ships of up to 65,000 DWT and Suez takes ships up to 150,000 DWT. Global shipping is shifting to ever-larger vessels. Bulk carriers and tankers often exceed 200,000 DWT, and those under 60,000 DWT are being phased out as uneconomic. Old general cargo vessels have been replaced by container ships, which started small but now exceed 35,000 DWT, and may soon touch 75,000 DWT. Such vessels cannot use the canal.

7. Ecological Disaster: This would cause a Major Ecological Disaster!

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