Sethu project is a white elephant

By Subramanian Swamy (Deccan Chronicle, Nov. 19, 2007)

Mr Kancha Ilaiah, in his article Science goes missing from Ram Sethu debate (The Op-Ed Page, November 16), is aggrieved that despite my PhD degree in economics, I have shamed the discipline by choosing to defend the Ram Sethu in religious terms. I may add that Mr Ilaiah, despite being an activist against the "Brahminical hegemony" in Hindu society has chosen to rubbish Maharishi Valmiki's Ramayana and its historicity, despite Valmiki being of Dalit parentage.

I oppose the rupture of Ram Sethu to dredge out a seabed furrow called the Sethusamudram channel on religious, economic, environmental and national security grounds. However, even if the project is economically viable, which it is not, environmentally acceptable, and safe from the perspective of national security, I will still oppose it, because breaking a 300-metre wide passage through the Ram Sethu is sacrilegious.

To the question, "Ram Sethu hai (Is there a Ram Sethu)?" I reply, "Ram se tu hai (You are from Ram)."

The central premise of the project that it is economically viable is based on the assumption that it will reduce travel time for ships from the west of India to the east, without having to go in a circular arc around Sri Lanka, as at present.

The DPR (detailed project report) prepared by L&T-Ramboll for the project calculates the distance and time thus saved for ships using Tuticorin and Kanyakumari as starting points and reaching Chennai at an average of 335 nautical miles and 30 hours respectively. But the error in the calculation is in assuming that all ships will save 30 hours or save 335 nautical miles.

For example, ships from Europe, West Asia and Africa will save much less time than ships moving from the east to the west coast of India. This is because ships sailing on open seas will travel at double the speed than permitted inside the channel, and the arc around Sri Lanka is of less curvature when coming from Mauritius or Europe and going to Kolkata.

At the current tariff levels proposed in the Sethusamudram Ship Channel Project (details in my forthcoming book: Defending the Ram Sethu), ships will in fact find it cheaper to travel around Sri Lanka rather than use the channel.

The project also calculates Indian and foreign interest rates for loans of nearly Rs 1,800 crores at half the current market rates, thus significantly understating the amortisation of the loans, and therefore grossly underestimates the cost of the channel. This naturally lowers the internal rate of return (IRR) on the project in a present value calculation, at less than 2.5%. No public sector project is permitted at such low IRR.

The usual way to calculate the economic viability of a project is to estimate the revenues over time, as well as the fixed and variable costs of the project. The net benefit to ships is calculated on the assumption of the tariff to be paid by ship traffic through the proposed channel, and set against the costs saved by taking a shorter route via the channel. Moreover, the now proposed 167 km long Sethusamudram shipping channel, created by dredging the ocean floor to a depth of 12 metres and a width of 300 metres, can structurally allow the passage of ships of only 30,000 DWT or lower tonnage.

However, most ocean-going ships today are above 30,000 DWT in weight and thus cannot use the channel. And yet, the DPR is premised on 3,000 or more ships passing through the channel, when the number can never be above 500 in the most optimistic projection.

Other substantive objections are that the project is a financial disaster that will guzzle resources on maintenance since it will require continuous dredging of sand; is environmentally non-sustainable, in fact hazardous; and will facilitate terrorists such as the LTTE to go from north of the Ram Sethu in Jaffna area to Tuticorin, which they cannot do at present.

The legendary bridge of coral reefs and rocks was built, according to the Ramayana, on the direction of Lord Ram. That such a causeway of coral rocks and reefs exists has been established by modern satellite photographs. That it was constructed, and is not a natural formation was established by Dr S. Badrinarayanan, formerly director of the Geological Survey of India. His report has been so far hidden from the Supreme Court by Ms Ambika Soni, the Union minister for culture.

The channel route chosen, of the total six that had been suggested from 1860 till 2005, involves cutting through the Ram Sethu. Interestingly, all the other five alignments suggested earlier, before or after Independence, called for skirting the Ram Sethu and cutting through land, either on the mainland at Mandappam, or through Pambam Island. The government's insistence on hurting the feelings of nearly a billion Hindus by preferring this non-viable channel is perhaps explained by the mindsets of Sonia Gandhi, M. Karunanidhi and Kancha Ilaiah.

To navigate the channel, a ship will first have to start slowing down two hours before reaching the mouth of the channel. Then it will have to follow several procedures leading to dropping of anchor and waiting for a pilot to board the ship to steer it through the fragile channel at half the speed of its open sea route. All this will consume 15 hours. Between October and December, cyclonic storms and winter monsoon will make the channel unusable.

The DPR underestimates the total fuel cost as it does not mandate the use of low sulphur diesel in the ecologically sensitive Palk Bay biosphere reserve area. In fact, there is no mention at all of low sulphur diesel that should be used in these areas. Our estimates for fuel savings are extracted from the L&T-Ramboll DPR, which simply states that the "ships will use IFO in the open seas and MDO in the channel where there is a restriction, and a need for a better vehicle response."

Thus, it is false to state that there will be a substantial saving on fuel costs by using the Sethusamudram channel. On the contrary, there will be a substantial loss of $500 to $950 depending on the tonnage of the ship. The viability of the project thus rests on a set of assumptions that are fundamentally flawed. It assumes savings for all ships are the same, when they are actually very different. Revenue and time saved have been vastly over-estimated, while costs of dredging and maintenance grossly under-estimated.

The project will also deprive thousands of fishermen living in Tamil Nadu's coastal districts of Thoothukudi, Ramanathapuram and Pudukkottai of their livelihood. Its impact on the fragile Gulf of Mannar will be disastrous. According to a report in Business Line on October 16, the project and fishing activities are mutually exclusive. The nation has to choose one or the other: Fishing or ship channel. Tamil Nadu's fishermen have not been told this secret yet.

The Sethu project has been justified on the basis of the cost savings estimates for ships using the channel. These cost savings have not been adequately detailed out and in fact the actual savings for ships using the channel have been grossly exaggerated. This is especially true for ships coming from Europe, Africa or other locations. The fuel savings for many of these ships is in fact negative, while the total savings (including reduction in time charter) actually works out to just 30% of what is claimed by the L&T-Ramboll DPR for most non-coastal ships.

The significantly lower level of savings implies that the tariff that can be charged by the channel will be much lower than that claimed by the DPR. This has significant revenue implications as over 60% ships which "benefit" will not want to pay the amount as claimed in the DPR. This project will be a financial white elephant. In particular, the DPR over-estimates revenue, under-estimates the cost, and chooses an absurdly low rate of interest to discount the net benefits to obtain a high per cent value to justify the project. We cannot allow the government to fool around with the public in this manner.

"I don't think this project will ever see the light of day because there is no money," said Ashish Kumar Singh, vice-president of capital markets at Axis Bank Ltd., to The Mint on September 24, 2007. Axis, formerly known as UTI Bank, was appointed as the "loan arranger" for the project in 2005.

Since the project's inception in 2004, costs have skyrocketed to at least Rs 4,000 crores, interest rates have crawled higher and old loan terms have lapsed. Mr Singh said that the project was languishing because "no company will dredge the channel for cheap and Indian dredging companies don't have the required equipment." Even before the first dredger began its work in 2005, costs had already spiralled to more than Rs 3,500 crores, Mr Singh said.

The loan sanctions, valid only up to Rs 2,400 crores, lapsed. To secure more money, he said, Sethusamudram Corporation Limited would have to return to the drawing board, draw up new reports, sit with parliamentary committees and receive fresh approval.

As of now, the expected shipping will not amortise the cost (including maintenance, regular dredging, costs of pilots, tugs, support vessels, communication and radar infrastructure), leave alone earn profits. Who then will use the channel, even if we overlook the LTTE Sea Tiger threat, the ever-present problem of cyclones, piracy, smuggling, marine pollution, fights over fishing rights, gun and drug running mafia operations, tsunami etc.?

There is also the security angle to be considered. Once the channel becomes operational, policing it would require a major increase in the assets of the Indian Coast Guard, customs and marine police in Rameshwaram and Tuticorin.

Keeping in mind the proximity of Tuticorin to the Palk Bay because of the channel, the Indian Navy too may have to consider permanently basing some assets in Tuticorin for more intensive surveillance, for the protection of future oil exploration rigs, and to ensure a quick response to threats from the LTTE.

Subramanian Swamy is a former Union Cabinet Minister for Commerce, Law and Justice

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