The Sethusamudram Fund

The unnecessary controversy over the very existence of Lord Rama has put a major question mark on the Sethusamudram project. The statements of the ASI and Karunanidhi has turned an earlier neutral Hindu public against the project, and it is going to be next to impossible for it to go ahead. In this regard, there is a need for some out-of-the-box solutions to tackle the problem.

Two things to consider here. First, what is the very purpose of the Sethusamudram project? The stated purpose is to cut down the distance taken by heavy ships which currently cannot go through the area and have to circumnavigate Sri Lanka, thus losing valuable time and money. The proposed canal will make it possible for these huge ships to just cut across the palk straits instead of going all the way through Sri Lanka.
The other thing is the very financial viability of the project. the project is supposed to involve significant costs (too lazy to google this out) and even before the existential controversy, numerous questions had been asked regarding its financial viability. Reports suggest that the payback period for this project some 8 to 10 years, after which it starts becoming profitable. By talking about profitability one assumes that the canal could be tolled and this raises the question as to whether the traffic projections have been overstated (from experience (mumbai-pune, baroda-ahmedabad, etc.) most planners make the mistake of overestimating people’s willingness to pay and thus demand for tolled roads, etc.).

So basically the way it works is that the government spends a huge amount of money upfront in dredging a canal, and then starts collecting fees from ships that want to use this canal. For a few years, not much money is made, but after that enough is made in order to make the dredging of the canal worth it. The ships save the cost of going around Sri Lanka, pay a fee in the government, and still make a profit (if they don’t, it is only if the tolls haven’t been structured properly). And over the long run (don’t ask me how long), the toll thus generated compensates for the investment the government is making now.

Here is the deal. Take out the physical dredging and the canal. Make it a purely financial project. Suppose the money saved by a ship by not going around Sri Lanka is Rs. X. And the toll is Rs. Y. And the net benefit is Rs. (X-Y) (with loss of not too much generality we can assume that this saving is per ton of cargo sent). Add to this the money value of time saved. Let that be Rs. Z per ton. Thus the net benefit of the canal to the shipper is Rs. X + Z – Y. What if he is paid this money?

Instead of investing the humongous amount of money into making the canal, let the government invest it in the bank. And use funds from this fund to compensate the shippers. Suppose you are a large shipper who was going from Madras to Tuticorin, and couldn’t take the Sethusamudram canal because it doesn’t exist. You’ll be financially compensated for it by the government. The money for the compensation, of course, comes from this fund. In the initial years, acceptance of this would be low, and less funds would be used. Whatever remains just gets invested back. Will definitely help pay the shippers when hte demand for the non-existent canal goes up.

Given our track of tolled roads, etc. I’m not if the projected returns from the actual building of the canal can be met. In this respect, this artificial compensation would surely help. And be a much sounder proposition from the financial perspective. And wouldn’t offend anyone’s religious sensibilities. Right?

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