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Sethusamudaram: Smart cost savings initiative or a White Elephant in the making?

Decision making is essentially about asking the right questions. One of the most basic questions that one needs to ask in an investment decision is: What do I get out of it? The Sethu-samudram project has taken on an emotional turn in India. Those in favor would go to any lengths to pump it up.. and those not in favor of it will also go to any lengths to pump it up.

But, if this were a purely corporate decision that I as a manager had to take – I would ask three questions:

  • Does it have customers?
  • Does it save time and add to convenience?
  • Does it save money?

And then compare the savings on these three with the cost I am expending. Right? And one of the essential cost that I would take into account is the maintenance cost on a regular basis needed to keep this passageway operational.

Without this kind of analysis, such a project is no different from those undertaken by Mohd. Bin Tughlaq.

Here are the views of an expert (Captain (retired) H Balakrishnan of the Indian Navy*) on all three question:

*He was one of the first batch of three Indian naval officers to do specialisation in anti-submarine warfare in the erstwhile USSR Naval War College.

Use to Customers

It is quite true. If you take global shipping trends today, to reduce operating cost, they go in for larger ships of the order of 60,000 deadweight tonnes and above. A 60,000 deadweight tonne carrier will need anything in excess of 17 metres of draft.

And as far as tankers go, the days of the super tanker are gone and you see only very large crude carriers of the type of 150,000 and 185,000 tonnes. It makes more sense to have such big tankers as in one voyage, you are bringing in more cargo and reduce your operating cost.

None of these big ships will ever be able to use the Sethu Samudram. So, the question is, for whom are you building the canal? 30,000 tonnes was alright when Sethu Samudram was conceived in the early fifties and the sixties.

That leaves you with only the coastal bulk carriers that carry coal from Kolkata, Paradeep and Visakhapatanam to Chennai or Tuticorin.

Time Savings and Convenience

I plotted physically on a chart what we call ‘passage planning’ for a bulk carrier on passage as it happens today from Kolkata to Tuticorin; one of them circumnavigating Sri Lanka as is happening today and the other one going through the canal.

The voyage distance from Kolkata to Tuticorin around Sri Lanka works out to 1227 nautical miles. If you went through the canal, it is 1098 nm. So, you are saving just 120 odd nm.

The story doesn’t end there. The majority of our bulk carriers go at a speed between 12 and 13 knots. That is the average speed at sea. I have checked with my friends who currently sail. They all said they do 12 knots. However, I worked in a bracket of 12-15 knots. So, if you are going around Sri Lanka at 12 knots at constant speed at sea, the time taken to reach outer anchorage at Tuticorin is 102 hours and 15 minutes.

When you go through Sethu Samudram, the point to be remembered is, you cannot proceed at the speed at which you are sailing at sea. The reason is the shallow water effect or what we call the ‘Squat Effect’. So, the moment you enter Sethu Samudram, you have to reduce the sped by 50 per cent or more depending on the conditions prevailing at that particular time. So, I worked on a speed bracket of 6-8 knots. But many of my friends tell me 8 knots is too high for a 30,000 tonne bulk carrier. In all my calculations, I gave the benefit of doubt to the Sethu Samudram project.

The second aspect is, it is not an open seaway; it is like entering a port. A pilot boards the ship, who is a local mariner with greater knowledge of the marine environment. The same thing has to be done at Sethu Samudram also. I have given one hour delay for the ship to reduce speed for the pilot to climb aboard. You repeat the process at the other end too for him to disembark.

With this 6 knots speed and 2 hours pilotage delay, my time to Tuticorin via Sethu Samudram works out to 100 hours 30 minutes. If you went around Sri Lanka, it is 102 hours 15 minutes! So, your net savings in time by going through Sethu Samudram is 1 hour 45 minutes! Is it worth spending Rs 2,400 crore to save 1 hour 45 minutes?

Finally, Cost

The Sethu Samudram project from the media reports and the statement given by the finance minister will cost at Rs 2,400 crore, of which Rs 971 crore is through a special purpose vehicle. The debt portion has been pegged at Rs 1,465 crore. Assuming an interest burden of 10 per cent, the interest payment on Rs 1,465 crore is Rs 146 crore per annum. Twenty to 25 years is the time given for repayment.

Assuming 25 years for Rs 1,465 crore, capital repayment works out about 56 crore per annum. So, Rs 146 crore for interest burden and Rs 56 crore as repayment works out to roughly Rs 204 crore per annum which is what the authorities will have to repay to any financial institution. This is only to break-even. But the web site says it is a profitable industry and it is going to make ‘mammoth profit’.

As the earning is going to come only from ships, I asked, how many ships are going to transit in a year through the canal? Ships that can use the canal will be coal carrying bulk carriers as long as the Tuticorin thermal power plant exists.

Having made the calculation, I feel they are rather optimistic in their figures. They have given a mean value of about 3,055 ships meant to use the canal in the year 2008 and by the year 2025, they expect it to go to in excess of 7,000 ships. Mind you, for 12 metres of depth! But I can’t see more than 1,000 ships using the Sethu Samudram canal in a year.

If you take Rs 204 crore as annual repayment, and 1,000 ships use it, your per ship cost works out to Rs 22 lakhs pilotage charge to break even. There is an interesting comparison done by K S Ramakrishnan, former deputy chairman, Chennai Port Trust. He pegs around Rs 50 lakh as pilotage rate per ship if you have to make a profit.

Then I calculated the fuel consumed. These ships consume 1 metric tonne of fuel per hour, which costs Rs 24,000. For the Sethu Samudram canal, you have to add the pilotage cost too. In effect, if a ship goes through the canal, a shipping company loses Rs 19 lakh per voyage. It is more cost effective to circumnavigate Sri Lanka from the point of view of the shipping industry.

Therefore, neither are you saving time nor is it viable economically. These are the two aspects that need to be highlighted. So, there is absolutely no advantage to the ships and the shipping industry. So, what are we gaining by spending Rs 2,400 crore of tax payers’ money? It is a white elephant in the making.

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Desh Kapoor

The panache of a writer is proven by the creative pen he uses to transform the most mundane topic into a thrilling story. Desh – the author, critic and analyst uses the power of his pen to create thought-provoking pieces from ordinary topics of discussion. He writes on myriad interesting themes. Read the articles to know more about his views and “drishtikone”.

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4 thoughts on “Sethusamudaram: Smart cost savings initiative or a White Elephant in the making?”

  1. This is one of very few objective anlyses about the project. Without going into the religious aspects, one should examine why some politicians are hell-bent on completing this. They must have a lot of vested interest like kick backs or landing-up contracts et al

  2. This is one of very few objective anlyses about the project. Without going into the religious aspects, one should examine why some politicians are hell-bent on completing this. They must have a lot of vested interest like kick backs or landing-up contracts et al

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