The government on Thursday cleared the long-delayed Sethusumudram Ship Canal Project off Rameshwaram in Tamil Nadu that would vastly reduce distance between east and west coasts of India.

The Rs 2427.40 crore (Rs 24.27 billion) project cleared by the Cabinet Committee on Economic Affairs may also tap the capital market through initial public offering or private placements to mobilise Rs 226 crore (Rs 2.26 billion).

Announcing the CCEA decision, Finance Minister P Chidambaram said a Special Purpose Vehicle would be set up for the implementation of the project that would create a navigational canal.

The canal will reduce distance of upto 424 nautical miles and sailing time of upto 30 hours for ships between east and west coast.

Elaborating on the project, Chidambaram said it was a dream for over 100 years. With the Cabinet nod, the government has fulfilled the Common Minimum Programme and Budget promises, he said.

"It opens up a channel that will enable ships to avoid going around Sri Lanka," he said adding the channel would bring benefits, as was the case with Suez Canal and Panama Canal.

Apart from giving a "decent return", Chidambaram said the project has "tremendous externalities" in defence, security and anti-smuggling.

It is estimated to cost Rs 2,427.40 crore, which is going to be funded by the Centre, port trusts, Shipping Corporation of India [Get Quote], Dredging Corporation and others, apart from a initial public offer or private placement of Rs 226 crore.

The total capital cost would be Rs 2,233 crore (Rs 22.33 billion) and financing cost Rs 194.40 crore (Rs 1.94 billion), Chidambaram said, adding the SPV will raise the funds.

He said the financial structure of the SPV would be in the debt-equity ratio of 1.5:1.

The finance minister said the Sethusamudram Corporation Limited will be the nodal agency for raising resources and implementing the project through Tuticorin Port Trust.

Elaborating on the government contribution in the SPV, Chidambaram said it would contribute Rs 495 crore (Rs 4.95 billion), while Shipping Corporation of India and Tuticorin Port Trust will contribute Rs 50 crore (Rs 500 million) each.

The Dredging Corporation of India [Get Quote] along, with the port trusts of Chennai, Ennore, Vizag and Paradip, will contribute Rs 30 crore (Rs 300 million) each.

The project, which has been hanging fire for almost a century-and-a-half, envisages linking the Arabian Sea with the Bay of Bengal by dredging the shallow waters to the North of Sri Lanka, thereby creating a navigable canal across the Gulf of Mannar, Palk Bay and the Palk Straits.

These waters have hitherto not been navigable by cargo shipping and the justification for the project is that it will save about 400 kms of sailing distance between the east and west coasts of India.

An Environmental Impact Assessment report was prepared by the National Environment Engineering Research Institute of Nagpur, although it has reportedly had no previous experience with marine projects of this nature.

The project was originally conceived in 1860 by the British Commander A D Taylor of the Indian Marines. Thereafter, almost once in every decade, a committee or a prominent expert made a recommendation in favour of the construction of the canal.

In 1955, for the first time, the government constituted the Sethusamudram Project Committee under Ramaswamy Mudaliyar to examine the feasibility and desirability of connecting the Gulf of Mannar with Palk Bay and its impact on the port of Tuticorin.

The committee recommended that the canal project be linked to the Tuticorin Harbour Project and that both projects be undertaken simultaneously. The cost of the joint project was estimated at Rs 9.98 crore (Rs 99.8 million). The Sethusamudram Project Committee report was, however, put in cold storage.

In 1963, the government sanctioned only the Tuticorin project.

Hope on the project was revived in January 1999 when the then Defence Minister George Fernandes announced that the government would complete the digging of the Sethusamudram channel in three years.