July 2, 2005 ☼ Economy ☼ Foreign Affairs
This is an archived blog post from The Acorn.
It was first conceptualised in 1860. Fourteen proposals and 144 years later, Prime Minister Manmohan Singh launched its construction today. Its current day proponents, led by the Indian central government, argue that dredging the Palk Strait will boost littoral and international trade, strengthen the capabilities of the Indian navy and even safeguard against tsunamis. Its opponents, of which there are many — the governments of Tamil Nadu, Sri Lanka, various NGOs and Green groups — claim that it will cause tremendous damage to the local ecology and affect the livelihoods of the fishing communities along the coasts of southern India and Sri Lanka. Besides, they say, no one is quite sure where the Indian government will put all that sand and silt it digs up.
Indeed, there are merits on the arguments made by either side. Much of the public debate has hovered around political and environmental issues. But a key factor, and perhaps the most important one, has not quite received the attention that it should. And that relates to the commercial viability of the project. While its promoters expect an internal rate of return of about 17%, the business case of the project is dependent on the cost of the alternative: the time taken to route around Sri Lanka. This includes costs of fuel, additional delay and risk.
It’s about Oil
Fuel costs, in turn linked to global oil prices, fluctuate significantly over the long-term. A project that looks viable when prices are high (like today) may not remain attractive when oil prices tank. Unless it has something radically different to offer, Sethusamudram will be forced to price its toll charges that are competitive with respect to the additional fuel costs of using the longer route.
Faster? Better?
Will the time saved using the shorter route through the canal be the differentiator? The time saving will be signficant for India’s domestic littoral trade. If ports on either coast improve their efficiency, bulk cargo and container ships may be able to provide an attractive alternative for domestic freight that currently depends on India’s inefficient railways and abominable highways. As for international trade, Indian ports have a long way to go before the canal route can be compelling enough for global shipping companies to consider. Time saved alone may not be substantial enough to justify paying a premium to use the Sethusamudram canal.
…safer?
Once it is built, the Sethusamudram canal may offer a safer route from an oceanographical point of view. But from a maritime security perspective, the canal straddles the areas controlled by the LTTE, which has a small but lethal seaborne unit. The Indian coast guard and navy are well capable of securing the canal, but the risk from terrorism cannot be ruled out, making the Sethusamudram canal no more attractive than the current route. Besides, compared to India, Sri Lanka has been more amenable to participating in the United States government’s shipping security initiatives. Shipping companies that need to comply with US government regulations will find it convenient to use Colombo as their port of call while transiting the southern Indian Ocean.
To boldly go
In a letter to the editor of The Hindu, Commander (retd.) GVK Unnithan claimed that “..if the charges are pegged lower than the fuel costs (to round Sri Lanka), the break-even period of 25 years will prolong to a century!”. (He also questioned its military utility, contending that the canal will not be of much use during hostilities for fear of hostile submarine activities.) The good commander’s points demand closer attention.
The Indian government has just taken a gamble. If the project can achieve the objectives that the government has set for it, it may even mitigate the damage it is causes the environment. And for the time being at least, New Delhi can count on high oil prices to keep it from looking silly.
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