MV X-Press Pearl: lack of preparedness fanned the flames

Originally appeared on The Morning

By Dhananath Fernando

There have been many sentiments expressed on social media that Sri Lanka did not have luck in the recent past. Adverse weather, a third wave of Covid-19, and the sinking ship are just the most recent incidents from a much longer list. I was reminded of the meaning of luck when I was watching a documentary on Hollywood star Will Smith. Smith recalled his father’s advice on his successful career from his humble beginnings. “There is nothing called luck. Even if there is anything called ‘luck’ it is where opportunity meets preparedness.” Smith recalled how his father used to call him at 3 a.m. after seeing his box office numbers.

When I think about Sri Lanka; it is true we really haven’t had any luck for the last decade, but I believe it is simply because we haven’t been prepared. So when the opportunity comes or even when a crisis occurs, we are not prepared. The delay in preparing our policies costs us each time.

Reforms in the shipping and maritime industry is one such area of policy reform that we have postponed for too long. With the X-Press Pearl sinking near the “Pearl of the Indian Ocean” in our territorial waters, it is clear that the economics and our policy of a maritime hub have to be re-evaluated.

One may be surprised at the connection I am implying between a fire in a feeder vessel and the country’s shipping and marine policy, and one may even wonder what economics has to do with it. Whilst it is true that there is no recipe or economic model to douse a fire, economic policy can create an economic ecosystem where we have many firefighters, technology, and partners capable of dismantling an emergency of this scale or even at a bigger scale. If we did have such a policy, it could have presented may options, which in turn could have helped us avoid such a catastrophe for the economy, our invaluable marine environment, and our pristine beaches. 

How good policy could have helped

An incident like an emergency fire and an event of this scale and the ability to avoid it will undoubtedly have numerous variables. It is a rare incident. There are thousands of feeder vessels and mainliners passing our Colombo Harbour and Sri Lanka ranks 24th on the list of “Best Container Terminals” in the world, so how is it that we did not have a system in place to fight a fire? This is a question we have to ask ourselves as a nation aspiring to become the centre of the Silk Route.

The adverse monsoonal weather and the Indian fire brigade vessels taking about two to three days to arrive, have fuelled discussions surrounding “luck”. However, something that should be explored immediately is why Sri Lanka did not have sufficient auxiliary services such as maritime fire brigade services, especially in a backdrop where the Port of Colombo is a regional transhipment hub.  

It is not a question of our commitment to overcome this particular emergency but about the absence of policy to bring in technology and international businesses to arrest the situation. Undoubtedly, it is one out of many alternatives. There are incidents where even with superior technology, ships have been sunk into deep depths.

The economic argument brings in the question of what alternatives could have been available to us to control the fire and avoid damage to marine life. The Sri Lanka Port Authority Fire Brigade and Sri Lanka Air Force did their best to stop the fire at its initial stages. In one reel of footage it was clear the officer in a helicopter was throwing some chemicals from bags to douse the fire. While their efforts are appreciated, in the modern world, there are more advanced helicopters, aircraft, and vessels for fire-fighting, and our Air Force helicopters or Navy vessels are not crafted to fight a fire of that scale. In the industry of shipping there are more and more companies that provide such facilities. The shipping industry is an ecosystem and container transhipment is just a one tiny part of it. 

It is easy to point fingers at the Government and ask why it can’t have such high-tech vessels and aircraft to combat fires at sea. The answer is simply that it is not the Government’s responsibility to douse fires nor does our Government have the money to make such massive investments. But it is the policymakers’ responsibility to create a business environment in the shipping industry where such supportive services can be established within our country. 

There are many reasons why such companies do not establish their businesses in Sri Lanka. One main reason is that there is no reason for smaller, supportive businesses to enter the Sri Lankan market when none of the bigger shipping companies or principals are based in Sri Lanka. Then, we have to ask the question why the main shipping companies or giant players are not entering the Sri Lankan market. The reason is there is a law that 51% of the ownership of the company has to be kept with a local agency. There is no reason for a globally reputed big shipping company to enter Sri Lanka by offering 51% of the ownership to a local company where there are many better options available in the region and globally.

As a result of Sri Lanka not transforming to a maritime hub because it is sticking to its archaic laws, none of the advanced technologies or support services that exist in the industry will enter Sri Lanka, and we will have the same discussion even in five years unless the reforms are made. 

Our snail’s pace movement in a dynamic industry has driven Sri Lanka away from becoming a maritime hub and we have become just a port with high container transhipment volumes – which is also now coming to a saturation with delays in operationalising the East and West Container Terminals. The lobbying against reforming these laws is very high, as there are many beneficiaries in the current system. Policymakers who attempted to do the reforms have failed or are set to fail. 

There has been another discussion on getting a reasonable insurance claim for the damages caused to our marine environment through this recent incident. Some policymakers even mentioned that the claim will be supported to overcome national financial difficulties. However, we have to re-evaluate whether our policymakers have enacted the supporting legislations on global conventions under the International Maritime Organisation, in our Parliament. Since the ship is still within our territorial waters, it is the domestic legal framework that the shipping company has to abide by. But without the necessary legal framework in place to become a maritime hub, facing such incidents in Sri Lanka with the big insurance companies and their experienced lawyers will be challenging. They will always find legal reasons to escape from paying compensation, the same as our motor insurance companies. Ultimately, poor Sri Lankan taxpayers have to bear the entire loss that will be caused to our pristine beaches, marine environment, fisheries sector, tourism sector, and all industries and livelihoods connected to the incident.

Many Sri Lankans are of the view that during the incident, luck was not on our side. If Will Smith’s father was right, it is true that Sri Lankans did not have the luck of combating the fire; it was that the opportunity in the form of the fire met our lack of preparedness for decades in the shipping and maritime industry. The rest is history.

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.

Liberalising shipping agencies the first step to transform Colombo into a maritime hub

The article was published on - FT, Daily Mirror, Ceylon Today, The Island & Daily News

Last week’s budget contained important proposals around the liberalization of the shipping sector.

The port played a significant role in the development of  maritimes hubs such as Singapore, helping the country become a first world economy in a generation. With the right reforms, Sri Lanka’s ports could do the same.

Singapore’s domestic market is small-but its trade volumes massive: trade value is 3.5 times its GDP. Transshipments make up 85% of Singapore’s port’s volumes. Sri Lanka has 750 local shipping, freight forwarding and clearing agents but Singapore open market has over 5000.

The availability of frequent and reliable connections via sea and air (thanks to liberalisation) encourages companies across the logistics chain to operate from Singapore. High-frequency connections sometimes allow goods to reach their destination faster via Singapore than they would through direct shipments.

A foreigner-friendly regulatory environment has attracted investors to Singapore.  Around 20 of the world’s top 25 logistics companies have based their global or regional operations in Singapore. The presence of these big firms drives local companies to emulate international standards

The Colombo port starts with a number of advantages; well situated on the trade routes, it has a deep enough draught to accommodate post-panamex ships.

With a limited internal market Sri Lanka, like Singapore, cannot depend on traffic from its hinterland to develop its port. It must depend on transshipment traffic. Colombo already handles a significant amount of transshipment – 75% of volume; but mostly to India. The expansion of Indian ports poses a threat to this business, but to truly become a hub Colombo needs to look beyond our largest neighbor.

Transshipment is a service that does not add any value to cargo. To grow this service lower business costs and productivity are critical. Fast turnaround times and competitive rates are needed but Sri Lanka’s restrictive ownership rules and fixed fee structures result in higher costs.

Unlike other major ports where cargo handling rates are determined by market conditions, Sri Lanka’s are set by the Central Bank which decides on agency and transshipment tariffs to local agents. The current fee structure is complicated, encourages malpractice, is determined arbitrarily and adversely affects port and logistics industry competitiveness.

To shipping lines working with very thin margins this fixed fee structure represents a significant additional cost. This limits transshipment volumes to the essential-those that flow naturally due to location. Shipping lines have little incentive to route cargo from further afield.

The budget proposes to lift restrictions on foreign ownership of shipping agencies and the creation of a port regulator. This is the first step towards attracting the interest of  large global shipping lines.

Sri Lanka will not  become a logistics hub without significant participation of global players. Substantial investments and presence of global firms active on ground is essential toward making the hub ambitions a reality.  

With the right reforms in place,  Sri Lanka could look to attract attract Maersk or another leading shipper to establish its South Asia hub in Colombo. That would go well beyond its limited activity with its present JV arrangement with a local agent.  Sri Lanka can use this anchor investment, to  attract other leading shippers to do the same, thereby creating critical mass.  This would result in a larger industry, more jobs and more opportunities for the industry as a whole.  

This would make Sri Lanka fertile ground for the top freight forwarders.  It might persuade DHL or others to look at Sri lanka sa a regional hub and  large e-commerce companies such as Amazon  to use Colombo for warehousing.

This is why the liberalization is needed.  To develop, the logistics sector should be open to foreign participation and restrictions (eg Sri Lanka Ports Authority monopoly on destuffing local loose cargo), regulations on terminal handling charges etc. should be removed. Foreigners should be permitted to invest in freight forwarding and the minimum investment thresholds and export revenue requirements imposed to be eligible to invest in declared free ports should be eliminated.

Warehousing space available within the port is limited and outdated. To support the growth of the logistics business, private investment should be permitted within the port; to build and operate new, upgraded warehouses. Alternatively, there should be zoning of a warehousing district outside the port but in close proximity to it (like Singapore).

Other investments include creating logistic networks between producer and consumer areas, markets and transport nodes that connect to the Colombo port, industrial zones and Inland Container Depots (ICD) that speed port access and support a modern logistics corridor.

The presence of global third party logistics firms in Sri Lanka will enhance the confidence of multinational manufacturers who will be more willing to use Colombo as a destination for value added logistics functions (e.g. packaging, labeling, quality checking, simple assembly) etc.

These firms will bring new technology, new knowledge about logistics and supply chain management and are experienced in managing highly sophisticated and complex supply chains for their clients. It is the trust the global firms have in their logistics companies that make them outsource key logistics and supply chain functions and their presence firms will be a huge value add to the location advantage of Sri Lanka.

These firms will also help market Sri Lanka as a destination for logistics- which is needed to get business. This is far easier for such firms with their global presence and networks, than for local businesses.

This would form the core of a maritime-cum-logistics hub as these anchor investments create an ecosystem of supporting services -- financial, legal and other professional services. A maritime-cum-logistics hub would be a boon to competitive local companies with relevant service-support skills, and allow some of the bigger competitive companies to go global.

The Colombo International Financial Centre, a financial hub between Dubai and Singapore, is underway within the Port City. Along with the proposed National Logistics Policy for Shipping and Air Transportation, and the Telecommunication Connectivity Policy it will establish Sri Lanka as the hub of the Indian Ocean.

Production and service standards would improve massively from their present woeful state, with more transparency and less corruption.

This aligns with the Port City, linking up the port and airport, a hub around the airport as part of bigger Vision 2025 plans and would be the beginning of Sri Lanka's insertion into global value chains beyond garments. The big prizes are in services, not manufacturing, especially with the "servicification" of Global Value Chain.

The lower cargo handling costs and greater efficiency will create spillover benefits to local exporters who will increase their competitiveness, further driving volumes.

Opening up the agency business does not necessarily mean the end of the local agents; Singapore has over 5000 agents and sub agents working for ship owners/operators in numerous support businesses.

The shipping and logistics business is continuously evolving and new competition is emerging. An ADB working paper opined that “Slow implementation of the Colombo outer harbor development plan has already caused significant damage to Colombo as a transshipment hub. This damage may be repaired but it is unlikely. Further threats to its current role exist, not least the further development of ports in India”

Sri Lanka has been lucky for a long time, because we still retain our advantage in terms of serving the Indian Sub-Continent cargo but it is naive to imagine that this will last. Sri Lanka is operating far below its potential, especially in terms of logistics. Therefore, it is important to remove all constraints which prevent us from reaching our potential.

The budget proposals are a good start but full reform package of port, shipping and warehousing services is needed. This presents much greater opportunities for existing players in the long term and they should seize the challenge. Unless reforms take place we may well find ourselves stagnating while traffic moves to competitors.