The East Container Terminal incentive

Originally appeared on The Morning

By Dhananath Fernando

I generally buy my toothbrush from a neighbouring grocery store. I usually gravitate towards one particular brand, but the shopkeeper convinced me to buy a different brand. The way in which he convinced me was so appealing, and to date I can recall the brand of toothbrush he recommended.

“Sir, there is a new brand in the market, which is the best. The thickness of the bristols are better and the handle has a special shape which can easily reach the teeth in your lower jaw.” He further explained the impact on my gums, how this model helps with oral hygiene and fights tooth cavities, etc. For a second, I thought to myself, this storekeeper must be a part-time dentist.

Later on, when I worked at a market research agency, I did a study on toothbrushes and I analysed the margins provided for retailers. Here I realised the particular brand my neighbouring storekeeper promoted provides a significantly higher margin than the rest of the brands for the retailer. So the business model is designed to influence the buyer by providing a better incentive. For any business, understanding and setting up the right business model will determine the success of that business in a competitive industry.

Sri Lanka’s debate on the East Container Terminal (ECT) has come into play in this context.

Sri Lanka doesn’t have a bright history of creating sustainable business models. The shipping business is a networking business. There are many stakeholders and decision-makers who could bring the businesses into the port at many levels based on the incentive structure. Our strategic location of the port is one advantage, but in modern days, a strategic location will not be sufficient to bring in the expected benefits in a broader economic context.

The Colombo Port is mainly a hub for transhipment business. According to Shippers Academy Colombo CEO Mr. Rohan Masakorala, transhipment is a very sensitive business as the business can move from one port to the other based on developments, if we fail to attract the right business partners. He has further provided an example of how Singapore learnt a lesson by removing a major shipping alliance from a partnership and the transhipment business moved to Malaysia. As a result, Singapore had to reverse the decision.

According to Mr. Masakorala, the lack of knowledge and willingness to take an outward-oriented approach on economics has resulted in Sri Lanka not reaching the benefits from ports as we should have. About 80% of ports and terminals in the world are managed by private-public partnerships (PPPs) and only 20% is managed by governments. In the case of the Colombo Port, through the Sri Lanka Ports Authority (SLPA), the government has a stake in all terminals whilst also playing the role of the regulator. It is the same as becoming the umpire of the game while contesting in the same game.

Usually, it is the ship owners who decide which port or terminal that has to be used. That decision is taken after considering the efficiency of the port/terminal and their business interest and the terminals in their network, in addition to the location. Shipping is a very cost-competitive industry and profits are based on volumes.

At the same time, the investment is front-loaded, which means you have to do a significant investment even before you start the operation. The higher the investment, the higher the risk and liability. In a dynamic business environment, a minor disruption in operations can cause significant losses and result in the loss of competitive advantage in this industry. This is the nature of this business.

The Port of Singapore is a classic example of the importance of entering into joint ventures.

Identifying the correct business model when managing ports and their terminals is of paramount importance. The business works in such a way that you opt for joint ventures and network with other stakeholders with the objective of attracting as many volumes as possible, while keeping  productivity and efficiency at a maximum. In a joint venture, it is not only the investment, but also the knowledge, knowhow, and the use of better management that are going to reap the real benefits.

If such a joint venture that reaps such benefits is implemented, then the country gets economic benefits across other sectors. As a country, we have to look at the broader economy and not a single industry, because at a broader level, all industries are connected with main factors of production – land, labour, capital, and entrepreneurship.

On the other hand, over the years, consecutive governments made the ECT project very complicated by signing Memorandums of Corporation (MoCs) and calling bids for operators and cancelling it multiple times. As a result, we have delayed this process for years. Our reputation  has been irreparably damaged by such prolonged delays, especially when taking into account the losses due to delays and the impact on investor confidence.

As this writer highlighted in this column before the general election, it could have been an opportunity for the then interim government and president to reflect not only the transparency, but also the importance of having a competitive business model. Following such a competitive focused model with partners across main shipping alliances and getting the ECT networked for more businesses would have reaped significant benefits by now.

Similar to the business model created by the toothbrush manufacturer with the retailer, we had the opportunity to arrive at a win-win business model, creating synergies and respecting local businesses as well as other stakeholders. From a geopolitics angle, if a transparent bidding process was followed with clear guidelines, then such external influences could have been completely avoided, as transparency and competitive bidding are the standard global good practice principle.

If the SLPA was to invest in the ECT in full, then the question arises as to why we wasted so many years without investing in the first place. It raises questions as to why we wasted time and who is responsible for the opportunity we missed for making profits. Therefore, the fundamental  business principle of ownership of risk must be considered with foresight. When private investors are brought into the business and when they risk their money, they are responsible to make matters efficient and productive. That doesn’t happen when governments invest taxpayer money. Many Sri Lankans fail to understand the basic role of incentives in economics and tend to only look at the ownership angle without realising the synergies of business models.

The second question is that the Sri Lankan rupee is under pressure. The recent Sri Lanka development bonds issuance has been undersubscribed by 25%, so the foreign exchange needed to invest in the ECT remains an enigma. All equipment and machinery has to be imported to keep it at a world-class level. We cannot afford to spend our valuable foreign reserves on this matter at this juncture. So are we going to delay the ETC further?

As always, only time will tell us whether Sri Lanka created the correct business model similar to the incentives given by the shopkeeper, or whether we opt to keep postponing this for a few more years and forget the opportunity to make profits from the port for business and the people of Sri Lanka.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.