What next for Sri Lanka?

Originally appeared on The Morning.

By Dhananath Fernando

New predictions are emerging that debt restructuring and International Monetary Fund (IMF) Board-level agreement may take until the end of this year. Another ongoing discussion is about the Local Government Elections and postponement of elections. Electricity tariffs are to be increased and 10 banks have been downgraded by Fitch Ratings as a recalibration of Sri Lanka’s sovereign rating.

Overall, it appears that economic reforms are being sidelined faster than expected, without realising the consequences of each action. It is true these complicated problems have no easy, straightforward solutions. No solution will be perfect and the validity, impact, and effect of any solution will be weighed against time. To put it simply, a solution that appears valid and reasonable today may not sound reasonable in a few weeks or months.

Each action has its consequences and inaction will also have consequences. It will be a battle between the consequences of action and inaction and the continuation of this for the next few years.

Reforms and restructuring

Let’s take the case of reforming State-Owned Enterprises (SOEs). With the election cycle commencing with Local Government Elections, attempts at restructuring SOEs such as the Ceylon Electricity Board (CEB) may be delayed. This delay means that inefficiencies will continue and tariffs will be increased without any competitive basis. This will in turn impact all businesses as well as macroeconomic indicators given the monopoly and the size of the electricity business. It may also extend the duration of power cuts and pave the way for another wave of protests, worsening the business environment.

Reforms too will be painful. Trade unions and some employees will be affected and an electricity monopoly can interrupt the life of the common man in multiple ways, with political and capital implications.

The cost of not implementing reforms will be much higher politically and economically, as it would be a cyclical result. Therefore, the reasonable decision is to restructure loss-making SOEs. Unfortunately, there is no other way out and delaying this further may invite darker years in the future.

The delays in the debt restructuring process will have its own consequences, both economically and geopolitically. The debt restructuring delay is a repercussion of maintaining bad foreign relations.

Poor international relations

How we treated India over the Economic and Technology Cooperation Agreement (ETCA) and in discussions on the East Container Terminal was extremely unprofessional and irresponsible. There is a significant difference between disagreement, negotiation, and unprofessional treatment.

By suspending the Light Rail Transit (LRT) project, we lost the respect and trust of Japan. We even annoyed China with the fertiliser matter and continuous regulatory delays with the Port City project. Our relations with the Middle East deteriorated with the cremation of dead bodies of the Muslim community during Covid.

We are not even in the good books of the US over the way we dealt with the MCC grant. Simply put, we do not have a friend who will extend a helping hand during troubled times. It is said that countries have longer memories than people. As such, we have limited our options due to our own grave mistakes.

A stalemate in a crisis

Economics and politics often go hand in hand. During an economic crisis, instability in politics is unavoidable. Our President does not have a direct mandate and the composition of the Parliament may not really reflect the people’s voice with the dawn of the completely new sociopolitical environment.

This was one reason the discussion of a common minimum programme was floated by concerned individuals and professionals, but it appears that this too has been discarded, with everyone slowly turning their attention to the election cycle. The calibre of our politicians is too inferior for them to understand the dynamics involved and to come up with responsive and novel policies and political options.

We are now in a stalemate, with a lot of short-term distractions. In such situations, we become distracted and waste our time on non-value adding activities without realising the massive deterioration of the quality of life. A deeper analysis shows that while the absence of economic reforms is a major issue, the fragility of our institutions is a bigger concern, with the institutional capability for the functioning of a basic society being almost nonexistent.

Solutions

Appointing capable and credible human resources for debt negotiations with China is essential to avoid delays. Acceleration of debt restructuring will unblock many other barricades, enabling us to move forward. There is a huge vacuum of capable human resources needed to carry out reforms. Therefore, providing space for already appointed committees to recruit more capable people and working out a time-bound solution matrix is important. The solution now lies in setting up institutions that can execute reforms to get us the required results.

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.

Missing the boat again

Originally appeared on The Morning

By Dhananath Fernando

The many wasted opportunities to capitalise on Port City

This is just a funny story I have heard before; not a true one. Once upon a time, a man was caught amidst a flood, and his life was in danger. This man was extremely religious and believed that his God would rescue him from any threat to his life. A boat came to rescue the man, but he refused, saying that his God was going to help him. Then an emergency rescue team arrived, and he rejected them as well, saying: “I don’t need you. My God is coming to rescue me soon.” Flood became very serious and a helicopter arrived, but the man said he didn’t want anyone’s assistance and the same answer was provided.

Unfortunately, the man died in the flood and he met his god after death. At the very first meeting with his God, the man said: “I am very disappointed with you my God. You didn’t rescue me from floods”. God said: “I first sent a boat to rescue you, and then another emergency rescue team, and finally I sent a helicopter as the floods became severe, but you didn’t consider any of my attempts!”

When it comes to our economy, isn’t that the same case for Sri Lankans? Sri Lankans leave the country, claiming we do not have economic opportunities. Some Sri Lankans even risk their lives by attempting to go to Australia and Italy by boat. When Sri Lanka attempts to implement policies where we could navigate towards the same development as some of the countries they aspire to run away to illegally, the same Sri Lankans oppose and protest.

Think about the recent discussions on the Singapore Free Trade Agreement (FTA), the Millenium Challenge Compact (MCC) agreement, East Container Terminal discussion, and now, the Port City public debate.

Instead, many believe working with a foreign nation is a part of a whole conspiracy. We are overwhelmed with the belief that we can become self-sufficient in everything under the sun. We have forgotten that the global context has changed. Global supply chains have changed over the last few decades. We as Sri Lankans have forgotten the power of mankind when we share ideas with each other. Connecting with each other and sharing ideas is sharing and creating wealth.

It is true that working with other countries is not a one-way street; it has to have mutual benefits. The way forward is not to isolate ourselves and attempt to do things on our own, but to connect with the world. That is how small countries like Sri Lanka can succeed.

As of now, Sri Lanka is at the critical juncture of getting the fundamentals right with the Port City Bill, which is now being challenged at the Supreme Court. Of course, constitutionality and the legal aspects have to be considered and cleared before we move forward. What is missing in the discussion is the concept of the “Special Economic Zones (SEZs), and the ability to understand that Port City has to be a special economic zone instead of a real estate project, where we just sell land to investors without creating a business- and market-friendly environment.

“Special Economic Zones” are a concept where a separate and an easy regulatory mechanism is set up in a region to create a business-conducive environment. Businesses can be done easily and people can live conveniently only when markets operate right. We have to establish special economic zones because the rules and regulations in the mainland or other parts are so laid back that doing business or convenient living is difficult.

Take current Sri Lankan regulation as an example: 80% of our land is owned by the Government, where the citizens haven’t been provided property rights. Which investor would invest in a business when the ownership of the property is not secured? According to Minister of Justice Ali Sabry, contract enforcement takes 1,318 days on average, where it is just 164 days in Singapore. The average time to resolve a criminal case is about 10 years, while our business registration takes months. Small and Micro enterprises have tiers of regulatory barriers. Granting a permit for construction takes more than three months or so for accessing electricity. Those are the fundamental reasons why people leave Sri Lanka – because the rules we have set for ourselves are not supporting our aspirations.

What we need to do ideally is to make the rules of the entire country easy for business, and for people to live. Since we haven’t had the political will nor the knowledge to do it, we have to go with second-best solutions. One of the second-best solutions is “Special Economic Zones” such as Port City.

What ultimately decides whether a country and its people are going to prosper or not are the rules that it sets, because our opportunities for investments, doing business, employment, real wages, and quality of life will depend on what we set as rules to govern ourselves. Those rules cannot be excessive, but have to support markets.

While the concept of a “Special Economic Zone” is in the right direction, we should not think that Port City is going to solve all our problems. We can attract investments only if we set an example by allowing market forces to operate. Our immediate term debt repayment challenges, and our regulatory barriers in the mainland, remain as they are, and we have to take a holistic approach on serious economic reforms connecting with the world.

The tax concessions suggested have to be reconsidered, as these would not only further distort our markets by giving just a few politically connected businesses tax benefits, but also a serious burden on our balance sheet when the Government expects to develop infrastructure near Port City, such as the connecting roads to the airport highway and the tunnel connecting Port City and Marine Drive.

We have to be sensitive about the geopolitics coming into play with Port City, and we should not lose our friends internationally. It’s a long-term project, and things change very fast in this era of time.

Like the man who said no to his god’s rescue attempts, we too have missed so many opportunities that could have complemented the Port City project further. If we had implemented the projects with the MCC (after clearing all constitutional matters), it could have been a better attraction to investors. On the MCC project that was developed by local experts, the project on facilitating the proving of land rights could have attracted more investors to Sri Lanka to set up manufacturing plants, and the Port City could have served as the financial service center.

The traffic plan and the infrastructure projects could have added significant value to the entire project. At the same time we could have managed our geopolitics better.

The same goes for the Singapore FTA. We could have provided a strong signal that we are a nation open for business by creating rules that support industry and strengthening trade relations with countries like Singapore. Investors expected to come to the Port City could have tapped into global talent, taking Sri Lanka one step closer towards becoming a global hub for business.

Again with the East Container Terminal, where more Indian investors could have attracted and created a Port City, a truly multicultural, multinational special economic zone. What history teaches us is that we have been provided with so many opportunities, like the man who was provided the chance to save his life from the flood. How we managed and what we did with it is something we have to rethink.

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.

In the Port City debate, hypocrisy is bipartisan

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

It is hypocritical for a political coalition that demonised the then Government and minorities by vigorously promoting the principle of ‘one country, one law’, to then propose to carve out the Port City development as a geographical area exempt from many of the laws and practices prevalent in the country. Those who sow the wind, reap the whirlwind. Because of this hypocrisy, the Government has great difficulty doing what it knows is the right thing for the country.

It is hypocritical for members of the dominant party in the previous Government (now split) to protest vociferously against the special treatment proposed for investors by the Colombo Port City Economic Commission Bill. They full well know the dysfunctions of the investment environment in Sri Lanka. The then Government was working on a bill on the same lines. There was discussion on placing the financial city within the jurisdiction of the English courts then.

It is not hypocritical for the Bar Association and other interveners to object to the proposal to establish an International Commercial Dispute Resolution Centre and to the associated legal workarounds. But it is wrong and self-serving. Members of the legal profession, more than anyone else, should know how dysfunctional the country’s legal system has become.

At the 47th Annual Convocation of the Bar Association, the Minister of Justice said that the average time to enforce a commercial contract in this country is 1,318 days (3.5 years). It is said to take one year to get a date for an appeal to be fixed for hearing on a criminal matter.

All of us who worked on improving Sri Lanka’s rank in the Ease of Doing Business Indicator know that the legal-system-related factors are a major factor in Sri Lanka being relegated to the back of the class. Poor performance in resolving insolvency and enforcing contracts are major contributors to Sri Lanka being ranked 99th out of 190 countries. On enforcing contracts, we are ranked 164th.

So, the previous Government was right when they considered placing contracts of investors in the Port City under English commercial courts. The experts who crafted the present bill were right in making arbitration by the International Commercial Dispute Resolution Centre mandatory and allowing for a fast-track engagement with the Sri Lankan courts as needed. Commercial arbitration is nothing new in Sri Lanka. To argue that it violates our Constitution is a little farfetched.

But of course, professional associations rarely allow logic and the national interest to come in the way of the financial and related interests of the members. The Sri Lankan legal system is one of the worst in the world, partly because the powerful private interests of the legal professionals are given priority over the interests of litigants and the country. It is not in their interest to admit how broken the system, they profit off, is. The Colombo Port City Economic Commission Bill is an indictment of that system. Lawyers, individually (as a prominent politician/President’s Counsel so vividly demonstrated) and collectively, are likely to oppose it.

The Port City bill is a workaround. It is needed because our systems are broken. President J.R. Jayewardene established the Greater Colombo Economic Commission (predecessor to the Board of Investment) as a workaround solution, by Act No. 4 of 1978 because our systems were a barrier to the attraction of needed foreign investment. We have the Katunayake and Biyagama zones and the various value-added manufacturing industries that are keeping our economy afloat, thanks to that workaround.

The tragedy is that 43 years later we are still doing workarounds. We need these stopgap measures, but we need to give the highest importance to fix all the systems that affect all our citizens, not just the foreign investors. Despite the specific mention of the doing business indicator in the Port City Commission Bill, the indicator is not done for enclaves but for the country as a whole. Improving the key systems across the country is what others are doing. India is now more than 30 places ahead of Sri Lanka, thanks to dedicated task forces. China is ranked 31st, more than 30 positions ahead of India and more than 60 ahead of Sri Lanka. I invite the readers to look at how well our competitor, Viet Nam, is doing.

If we do not improve the ease of doing business for all, we will be overtaken by Pakistan soon. They are taking concerted action to improve performance on the components and are now just nine places behind. Do the work around, but for God’s sake, focus on system improvements throughout. Define threshold levels in the Port City Bill itself when the workarounds can be discontinued, and we can celebrate living in a country where the legal system does not require bypass.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Falling in love and developing a country

Originally appeared on The Morning

By Dhananath Fernando

Why both are about processes and not single moments

Simon Sinek, a management consultant and the author of the book “Start With Why”, in a video interview provides some interesting thoughts about measuring “how much you love”. He questioned the moderator: “Do you love your wife?” and the moderator answers: “Yes, of course,” and Simon asks back: “Can you prove it? What are the metrics that you use to prove that you love your wife?”

Obviously it’s a difficult question to answer by anybody, because while love is a feeling which we know exists, it is very difficult to prove in which form it exists. Simon then explains how “falling in love” is a process rather than just an event. It is true there is love at first sight but proving how much you love someone and quantifying it is not easy. Simon explains how tiny little acts like greeting, listening, sharing, caring, dating, and understanding convert to love over a period of time, and that it’s really difficult to pinpoint at which point it became love or how much we love someone. You can check it yourself by trying to recall at what point you really fell in love with the ones you love.

I feel that Simon’s thoughts are not just relevant to love but also applicable to the concept of development of a country. Many of us think development is just a one-off event without really understanding it as a process that occurs over time. We always associate the “development of Sri Lanka” to actions and outcomes such as electing appropriate leaders or utilising an existing natural resource. If we look at recent Sri Lankan history, we have always been of the opinion that one single event can transform Sri Lanka into a high-income country. As a country, we were excited when there was news of a gold mine or even a single incident about a herbal syrup developed for Covid, thinking that this could have taken Sri Lanka out of poverty, by exporting the syrup to the entire world. We tend to get excited when we see news stories on exploring our valuable phosphate mines or hear about explorations of crude oil in our marine territory. We repeatedly forget that all these resources have zero value if we do not have the right institutions as a country. Just take Venezuela for example. They were the fifth largest crude oil supplier in the world, but the exploitation of such a valuable resource is not reflected in the ailing economy.

Sri Lanka’s case remains quite similar. We too have an adequate resource base, but the same resources have become a barrier to our development. This is mainly because we have failed to set up the right institutions. As a result, we always tend to celebrate events and just spend the days, rather than thinking about our economic development in the long term. Now the public discussion on economics is on the China swap agreement of $ 1.5 billion and on the investments in the West Container Terminal (WCT). In both cases, we have failed to propose a credible plan for our debt sustainability or to set up an open transparent tender process on selecting investors for the WCT. This has been the same operating procedure across all governments. So, most likely, these two discussions would just become events to celebrate, which will then be forgotten after a few weeks’ time. Then, we will be back at square one after a few months’ time on our development agenda.

Many have misunderstood the role and purpose that institutions play in the road to development, here in Sri Lanka. Sri Lankans generally perceive a building or an agency as an institution. The Supreme Court or Election Commission are also associated as the bedrock institutions of a country. However, in reality, it is what they represent in a democracy that really defines the meaning of an institution. So the meaning of an institution goes beyond physical places.

According to Jim Collins’ book “Good to Great: Why Some Companies Make the Leap…and Others Don’t”, it is not the time tellers but the clock builders that matter. Building an institution is something like building a clock where the concept of time is communicated to anybody at any time without any discrimination. It is a platform where time is shown to all, even without the presence of the actual builder. Just take the election process as an example. The election process is an institution where people have the right to exercise their choice in selecting the person who is suitable to govern. It is not the Election Commissioner or the Election Commissioner’s office that matters. Of course the physical building matters, but it is the concept of election that matters rather than the office.

It is the same when it comes to our economy and facing economic challenges. The recent swap we received would be a great relief for Sri Lanka. Especially at this juncture, as this column highlighted many times, this creates a need to engage with our bilateral partners and international agencies. But instead of just celebrating the swap, we need to direct the institutions to ensure our debt sustainability. We should establish a mechanism for managing our debt, under a single office and a system to avoid borrowing beyond our capacity to repay. Our currency and Central Bank must have the institutional power to roll out the right monetary policy to ensure that our currency is worth holding and people’s hard-earned money is not devalued due to higher inflation.

When it comes to ports and foreign direct investments (FDIs), our need is not to speak to investors and select them single-handedly and offer unsolicited projects, but to set up the right institutional framework, so that any investor will have the ability to invest and to make the process simpler, easier, competitive, and transparent. That is a “clock” that we have to build instead of celebrating the short-lived “time telling” moment. We have to face the moment of truth at one point and our moment of truth for the last few decades is that we have failed to reach $ 4,000-plus per capita income except for a short period before Covid. Our basic needs such as housing, transportation, education, and healthcare have been the same as the last few decades and the improvements are not taking place. As a result, Sri Lanka has become what it is today.

The fundamentals behind sustainable development involve setting up the institutions. When institutions are built and strengthened, the physical infrastructure falls in place, human values such as genuine, integrity, and hard work get recognised. 

The path to development is like falling in love, as per Simon Sinek’s example. It’s a result of so many tiny little actions. Same as “love”, the importance of institutions cannot be seen sometimes or even cannot be measured. But it’s there and it’s the foundation of the development of a country if we are serious about making Sri Lanka a free and a prosperous nation.

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.

A sportsman’s advice for the ports game

Originally appeared on The Morning

By Dhananath Fernando

The problem with GoSL’s ‘East to West’ plan

I was of the opinion that rugby was always a big boys’ game, till I met Sudath Sampath, the legendary former Sri Lankan rugby Captain who was fondly known as “Little Serevi” (Waisale Serevi is a Fijian former rugby union football player and coach, and is a member of the World Rugby Hall of Fame). 

I met him at the University of Colombo when he was the head coach. I was surprised how he became one of the best rugby players Sri Lanka has ever produced, given his physical stature. He did not fit into the typical rugby player profile of six feet tall and about 90kg in weight; but he was agile, fast, and very sharp at assessing the game.

He is also a master of the rules of the game. Rugby is a complicated game with many rules. There is one set of rules for the scrum, another set of rules for a ruck, and separate set of rules for a lineout, in addition to the general rules, such as not dropping or passing the ball forward. 

One main advice by Mr. Sampath to be successful in the game is to “know the rules of the game and know it really well”. He wanted players to watch the same game many times on how the “All Blacks” understand the game and its techniques.

His second advice was that “it is better to be agile and be a team player than being stiff and play an individual game”. I not only often recall Mr. Sampath’s advice in personal life, but also in Economics, especially when it comes to the Colombo Port and its container terminals.

“As a country, do we know the rules of the game in ports and do we have an efficient and flexible turnaround system?” is the question we have to ask ourselves everytime we see the debate on Colombo Port. After a massive national debate on East Container Terminal (ECT), the discussion is now moving towards the West Container Terminal (WCT). According to media reports, it will be a 35-year agreement with an 85% share to India’s Adani Group of Companies to operate it on a Build-Operate-Transfer (BOT) basis, and keep a 15% share for the Sri Lanka Port Authority.

So first let’s try to understand the game behind the port operation’s business model. Then let’s try to debunk the myths. It must be first understood that a port cannot survive just because it has a strategic location. The strategic location is important, but it is no more the single deciding factor for a port to be successful. 

The Port of Djibouti in Africa is strategically located, while it is also a member of the Belt and Road Initiative. However, the port is not considered a successful one. On the other hand, the port of Salalah in Oman and the Port of Tanjung Pelepas in Malaysia are thriving ports in the world, handling significant container volumes, but are not strategically located.

The simple reason behind the latter two ports’ success is that they know the rules of the game, and have a sharp understanding of how the port business works. It is a networking industry, requiring investors and their management practises that can increase the efficiency or number of moves per hour and the turnaround time, thereby making the port operations faster  and helping shipping lines process their containers faster. 

Distance to a port from the main shipping route matters, but efficiency matters too, as they both determine the cost for the shipping line. Therefore, in order to be a global player in the shipping business, Sri Lanka must be connected with the main shipping lines, as well as being efficient and agile in our delivery of our port operations. 

To maintain that connectivity with shipping lines, Sri Lanka should be open to foreign direct investments and create an investment-friendly environment. Improving efficiency must be the bedrock of this business model, along with private domestic investment. This way, any investor who risks his money, time, and resources is psychologically motivated to recover the investment. 

One can understand the importance of this factor by comparing employment numbers and efficiency rates (number of movements per hour) of the SLPA-operated JCT, and private sector-operated joint ventures, SAGT and CICT.

So what would be the consequences of picking WCT before ECT? First, being open for foreign direct investment and attempting to get global partners is a decision in the right direction. Foreign direct investment brings much-needed knowhow, which spills over to other industries and increases productivity. 

However, the ideal procedure should have been an open tender process, so that the best business offer of foreign direct investment could have been evaluated competitively. To avoid the geopolitical tug-of-war between China and India, the tender procedure could have been structured by the respective geopolitical interests. 

If the Government is to be believed, the current procedure has been to request the respective governments to nominate their business partners. However, this prevents the achievement of best possible outcomes for the country as it is brought by a competitive bidding process.

Secondly, is there an incentive in leaving the SLPA to operate the ECT, and opening the WCT to foreign direct investment? Well, this simply doesn’t make much sense, for it will be disadvantageous for the ECT! 

Given the financial situation in Sri Lanka, it is very unlikely that the Sri Lankan Government and the SLPA will have the fiscal space to invest in the  ECT. The gantry cranes and all other machinery for the necessary infrastructure will need to be imported, and the availability of foreign currency for such an investment remains a question mark. 

The ECT is already late by more than two years, and it will take another 18 months from the date of commencement for the infrastructure development to be completed. So in simple terms, chances are limited for the ECT to take off in the next few years.

If the operation of the WCT, which requires more infrastructure development compared to the ECT, does get off the ground soon, the business ecosystems will be focused towards the WCT, as they can be more efficient and have the scale to connect with other global partners. 

That may leave the ECT in its current stage with only hollow ownership for the Government, without generating revenue and profit, or its full capacity being utilised. Ultimately it will affect the entire efficiency of the port. 

The concept of making Colombo Port a maritime hub will be just another daydream. The original design of the entire port is to handle about 30 million TEUs with the development of the port along identified phases. 

This was the identified strategy to become a maritime hub but the delays we incurred from political parties and trade unions is most likely to pull us back and make us more insignificant in the Indian Ocean.

The Galle Port, which is under SLPA, was involved in discussions for years to be developed as a yacht marina. However, the opportunities have now shifted to Oman and Dubai. We haven’t been able to optimise the Trincomalee Port, even more than a decade after the war ended.

All these resources remain under our ownership but remain underutilised or underperforming. Unfortunately, we continue to play the ports  game without knowing the rules, thereby losing lucrative opportunities and playing self-interested petty politics without being a team player, whereas the entire country could have been a beneficiary of the competitive transhipment business. “Little Serevi” Sudath Sampath would not have approved.

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.

Celebrating all the wrong things

Originally appeared on The Morning

By Dhananath Fernando

There can be no independence without economic freedom

The lockdowns amidst the pandemic left all of us with ample time to explore new avenues in life. A friend of mine, excited to learn, enrolled himself in a bunch of online lessons with the motive of productively utilising this time. However, as time progressed, he got too lazy to keep up with the lessons and succumbed to the comforts of his home. He watched television, read novels, and baked way too many cupcakes. He did everything except follow through with his lessons, all the while feeling immensely guilty for failing to do so.

Every independence day, I can’t help but draw parallels between my friend and my motherland. We, Sri Lankans, are quick to celebrate independence with much excitement, just like my friend was to learn, but we fail to actually do the hard work to follow through with the initial commitment. We are quick to identify that learning is vital and even advocate for education. However, we lack initiative. Similarly, we proudly celebrate the British leaving us but have failed to do the work to achieve freedom in real terms.

As a result, over the years, Sri Lanka has only achieved certain elements of independence and democracy. Economic freedom remains an enigma up to date. Whether our fellow Sri Lankans have the ability to engage in business and trade with each other voluntarily has become a serious question. 80% of our land is owned by the Government. People have to wait in long lines and oil the palms of bureaucrats with discretionary powers to obtain a licence to cultivate a crop they think is best to earn a living.

Whether our fellow Sri Lankans can make economic decisions for the betterment of themselves and their children is a question which still remains unanswered. Yet, we opt to proudly celebrate “independence” with minimal comprehension of the true essence of freedom. I fail to see a big difference between my friend and this popular uninformed “patriotism”. 

Over the years, we have been excessively reactive rather than being proactive. Similar to my friend who celebrated the opportunity he had to learn but failed to follow through with it, we too continue to celebrate independence in its literal terms. To put things into perspective, let’s take a look at Sri Lanka’s economic incidents in the recent past.

We signed a Free Trade Agreement (FTA) with Singapore and went against our own terms and celebrated the “victory”. Since then, we have done very little to enhance Sri Lanka’s involvement in global trade. Instead, we continue to hamper the island’s economic growth and development through consistent import and export restrictions as highlighted by this column on numerous occasions.

We spent way too much time debating the Millennium Challenge Corporation (MCC) Compact for more than two years and eventually celebrated not signing the agreement. The agreement could have helped Sri Lanka enhance her land use and improve transport and traffic. It is clear the issue was politicised. However, we could have informed the donors as to why we opted not to sign the agreement before they directed the funds elsewhere. Even without the MCC Compact, we have done very little to reform the island’s myriad transport, traffic, and land use issues.

Recently, we celebrated withdrawing from signing a Memorandum of Understanding  (MoU), foregoing much-needed Foreign Direct Investment (FDI) for the development of the East Container Terminal (ECT). The development here had already been delayed by more than five years. Do we have a plan for the ECT’s development? Have we thought of competitive bidding? Do we have a better cost structure to implement investments on strategic assets? Sadly, the answer is “no”, yet again. It is clear that we Sri Lankans celebrate poor policy measures as victories and fail to embark on proactive actions that cause real change.

What causes real change?

Instead of celebrating policy measures that stunt Sri Lanka’s growth, we have to work towards establishing economic freedom and initiate important but hard reforms. What we should celebrate, however, is the implementation and impact of progressive policies.

The Economic Freedom of the World Index by the Fraser Institute states that countries with high economic freedom are more likely to prosper. The quality of life in these countries is evidently much better than countries with low economic freedom. If we wish to be free and independent, we have to prioritise economic freedom.

Sri Lanka has to implement reforms that ensure people’s ability to do business with ease, voluntarily without any barriers. We have to strive towards attaining a small government. The legal system and property rights have to be strong. People should be able to resolve their court cases faster and with improved efficiency. Sri Lankans should be given the right of ownership to their land and property especially on what they wish to do and grow on these lands.

Sri Lanka’s monetary system has to be stronger. We should have sound money where people do not lose the value of money in hand, due to the use of a bad monetary policy. When the value of money depreciates (from inflation), it is the poor who lose their freedom to buy what they want. Vulnerable sections of Sri Lanka are definitely the most affected.  Inflation is the unkindest tax of all as the poor have no defence against it.

Our businesses should have the freedom to trade internationally and barriers to trade have to be removed. Sri Lankans should not pay about 80% on their tiny bathroom tiles or 300% for the vehicles they use as taxes. They should be given access to trade internationally without any barriers. A minimum and appropriate regulatory environment is fundamental if we Sri Lankans wish to enjoy real freedom. Currently, to register a sole proprietorship or a partnership, a library of documents have to be submitted to authorities. It takes weeks for these documents to process when it should be a matter of a few minutes. The Government should not hinder the growth and development of our own people and their businesses.

On last year’s Independence Day, President Gotabaya Rajapaksa stated that he wants to remove regulatory barriers at all levels. A few weeks ago, he appointed a committee to evaluate unnecessary regulation for businesses.

The Economic Freedom of the World Index compiled by the Fraser Institute is a good indication of whether a country is moving in the right direction in terms of economic freedom. I wish and pray that we celebrate actions and reforms taken to improve economic freedom instead of celebrating the wrong forms of independence. If we fail to initiate hard reform and establish economic freedom, we will continue to celebrate independence for the wrong reasons. Then Sri Lanka’s prospects would be the same as my friend who makes no progress.

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.

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.

Interdependency, the framework for India-Sri Lanka relations

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

Governments on both sides have changed several times since work began 18 years ago on a comprehensive economic partnership agreement between Sri Lanka and India. One constant has been the failure to complete the agreement.

This is cause enough to step back and reassess strategy and tactics.

Is a legally-binding agreement necessary?

China’s investments and trading activities in Sri Lanka are growing rapidly, with no agreement in place. Perhaps this indicates that agreements are not necessary.

Because most economic actors in both India and Sri Lanka have a degree of autonomy from the state, companies will not simply invest as directed by political authorities to satisfy strategic objectives.

I recall the lack of enthusiasm on the part of India’s majority-State-owned IOC to take over the colonial-era oil tanks in Trincomalee in 2002, in the absence of a viable business plan. They obeyed their Government’s directions only when the tanks were bundled with a fuel-distribution business.

Private entities will take risks, but they would prefer reduced risks of administrative expropriation. What bilateral or other trade and investment agreements do is reduce risks flowing from state action.

Economic actors who are immersed in “deal culture” dislike legally binding trade and investment agreements. They prefer deals worked out through favorably disposed politicians and officials. Their opposition is not worded in this language, but is clothed in the rhetoric of national sovereignty.

In practice, the authorisations for employment of foreign professionals and for investment in the telecom and IT industries in Sri Lanka were GATS Plus, or more liberal than the legal commitments that had been made.

I pointed this out to a leading opponent of the IT sector commitments in the India-Sri Lanka agreement. His response was that unilateral liberalisation could be withdrawn, which was not the case with treaty-level bilateral agreements. The external investor or trader is thus exposed to risks of rule changes damaging to his business case. This can only be mitigated by partnering with a deal maker.

The deal maker gets fees and a share in the operating entity, in return for greasing palms. I recall a well-educated and connected Sri Lankan then residing in the US coming as part of a delegation to talk about a satellite telephony license when I served as Director-General of Telecommunication. As the group was leaving, he tells me quietly in Sinhala to mandate a local partner so he can get in the game. No licenses were given so the question of creating a legal requirement to pay fees and a share of earnings to the deal maker did not arise.

These rent-seekers must be marginalised in the national interest. But they draw their strength from the power of national-sovereignty rhetoric, especially in relation to India, the focus of atavistic fears going back to the depredations of Kalinga Magha in the 13th Century CE. The public and the politicians are persuaded more by these appeals to emotion and less by evidence-based claims about the benefits of trade and investment.

A new frame

What people fear is dependency. If the electric grid is connected to India, they fear it will be shut off or constricted. They see how Bhutan’s election was influenced by constrictions on fuel supplies and fear Sri Lanka’s internal decision making may be compromised because of dependence on India. India is 50 times the size of Sri Lanka. Dependency on India is feared.

These fears can be overcome by changing the frame to that of interdependency. India could have crippled the Bhutanese State if they stopped purchases of electricity, which constitutes 70% of Bhutan’s exports and makes up most of Government revenues. Yet, a halt in electricity purchases is unlikely because that would cause massive disruptions to the economies of West Bengal, Bihar, Odisha, and Jharkhand. Disruption of the relationship would cause damage to both sides. Keeping it going benefits both. This is interdependency.

The continued success of the Port of Colombo depends on its use for trans-shipment by India. If not for Indian volumes (over 70% of the total), Colombo would not be 25th largest container port in the world and would not be the 19th best-connected port according to UNCTAD. Especially before elections, Indian politicians talk up the need for a hub in South India to retain the trans-shipment payments now flowing to Colombo.

Recently, Prime Minister Modi announced a trans-shipment port in the Great Nicobar Island, which could damage Colombo’s position as a regional hub. If Indian containers are routed elsewhere, Colombo will soon lose its attractiveness to the shipping alliances. Sri Lankan exporters will lose direct and frequent sailings and the port would lose earnings from trans-shipment related services. India will have to invest massively in building up a new hub which may or may not have the proven efficiencies of Colombo. Definite loss for Sri Lanka; uncertain and costly outcome for India.

Addressing India’s concerns

India may be seeking to invest billions of dollars in a new port because they fear dependency on a foreign port with significant Chinese presence for vital freight movements. How can the India’s legitimate concerns be addressed?

One way is to allow India an equity stake in the Colombo Port. That was at the heart of the conversations with India about Sri Lankan ports since at least 2003, the latest manifestation being the tripartite agreement about Indian and Japanese investment in the East Container Terminal in the deep-draft South Harbour.

If this were completed as agreed, the incentives of India and Sri Lanka will be better aligned. In addition to enjoying the benefits of Colombo’s efficiencies and network economies, India would now also benefit as an equity investor. Security concerns would be assuaged.

India and Sri Lanka may also consider a bilateral agreement governing port services between the two countries. The 2003 report of the Joint Study Group on the India Sri Lanka Comprehensive Economic Partnership Agreement included negotiated language to this effect, wherein India would recognise the port of Colombo as a hub within the southern Indian maritime transportation system. The intention then was to include this as one element of the overall agreement covering trade in goods and services, in investment, and in cooperation and confidence building.

The two countries have failed to conclude a comprehensive agreement in 18 years. An interim solution would be narrow agreements wherever possible, one for maritime transportation, another for aviation, another for grid connectivity, and so on, each anchored on, and presented to stakeholders and the public in both countries framed in the language of, interdependency and win-win. In each case, concrete benefits will be gained, and confidence built. Objections based on fear of dependency and foreign stranglehold of key economic facilities may be refuted not just with arguments, but with ongoing experience of mutually-beneficial sectoral collaborations.

If a policy window opens for a comprehensive agreement, the opportunity can be taken. But even here, would it not be better to have ongoing “pilot projects” from which lessons can be learned? Pursuit of the comprehensive approach has been unproductive, so far. A different, incremental approach is worth trying.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

Economic relations with India: What would a true patriot do about the Port?

Originally appeared on The Daily FT

By Prof. Rohan Samarajiva

The East Container Terminal (ECT) in the South Harbour of the Port of Colombo has become a flashpoint of nationalist agitation. Agreement had been solemnly concluded to develop the ECT in collaboration with the governments of India and Japan. Some, fronted by trade unions, are agitating to scrap the agreement and make the terminal one that is fully owned and operated by the Sri Lanka Ports Authority (SLPA). Hoary arguments about selling national assets are being trotted out again.

What would a true patriot do?

True patriotism asks what advances the life chances of the people living on this island; it asks what reduces the harms that may befall them. A realistic assessment of the problem at hand must be the first step. The Port of Colombo comprises operations by three entities: the CICT which handles 40% of the business through one terminal is majority-owned by China’s CM Ports (SLPA has 15% ownership); the SAGT is 85% owned by a consortium including JKH, Maersk/APM Terminals and Evergreen Marine Co. (SLPA owns the rest); and JCT which is fully owned by the SLPA.

The ECT is the second terminal to be made operational in the South Harbour which remains the only deep-water port in the region capable of accommodating the largest ships. The Port of Colombo was the 25th largest in the world in 2018, in terms of container throughput, and showed rapid growth before the recent disruptions. An economy the size of Sri Lanka’s cannot support the world’s 25th largest port if all it handles is cargo originating from and terminating in the country. More than 70% of Colombo’s cargo is coming from or going to India. India’s two largest ports are JNPT in Maharashtra and Mundra in Gujarat. Colombo handles more Indian boxes than Mundra, arguably making it India’s second-largest port. If for some reason the Indian containers were not transshipped through Colombo, the losses to the Sri Lankan economy will be grave. The earnings from what is essentially an export of port services will cease. Colombo will no longer justify frequent liner service. Sri Lankan shippers will have to send their containers in small ships to a regional hub to be transshipped to the large vessels that no longer call at Colombo. Hub ports enjoy economies of networks.

The more ships call at a port that provides transshipment and related services, the more attractive that port becomes to other ships. It provides a degree of stickiness to a hub, but hub status is not permanent. If the quality of the services provided declines or prices are higher than those in competing ports, a big shipping alliance (three alliances are responsible for 80% of the container traffic) may pull back leading to the unravelling of hub status. One of the reasons Colombo is a preferred port for shipping alliances is its turnaround time: how quickly can a ship leave the port after unloading/loading. It is behind Singapore and other leading ports, but quite a bit ahead of Indian and Bangladeshi ports. However, the strikes that were launched before the elections on political matters unrelated to working conditions may be putting Colombo’s reputation at risk.

Alternatively, a government decision based on geo-political considerations may trigger the process. Especially before elections, Indian politicians come up with plans to build ports in the south of India that will create new employment and business opportunities and ‘save’ the $ 100 per container they claim goes to Colombo for transshipment. But the more real danger is the significant Chinese stake in Colombo Port which may be seen as a strategic vulnerability in the context of the simmering tensions between India and China. The Port of Colombo, which is dependent on transshipment business from a single country, is especially vulnerable in this regard.

Geopolitics

Even if one focuses solely on the Port of Colombo, the geo-political factors loom large. The largest terminal is owned and operated by a Chinese company. The refuelling of Chinese submarines in the port in 2014 was source of serious friction. The tensions between India and China are at a historical high currently. In this context, a decision to give an Indian company a stake in the ECT, and thereby in the success of the Port of Colombo, would give comfort to the securitywallas in New Delhi. It makes eminent sense in terms of safeguarding Colombo’s hub status and revenue stream. Whatever decision is taken about ECT will be interpreted in a larger context. Prime Minister Mahinda Rajapaksa has asked India to withdraw its interest in the under-utilised and money-losing eponymous Airport located in Mattala. The government is also reported to have asked India to give back the rights to the unused but controversial oil tanks in Trincomalee. The Indian government is likely to connect the dots in ways that reinforce the perception that the Rajapaksas are tilting toward China.

But what about not selling national assets?

The land and the location are not sold. The port continues to be owned by the SLPA. It is simply one section of the south harbour that is to be concessioned out for a defined period for a specified purpose to a consortium that will also include the SLPA. The land by itself does not produce value. Value is produced when the right kinds of investments (including the right kinds of gantry cranes, not what were ordered for a different location) are made and the right kinds of services at appropriate levels of quality are supplied. Because of the relative power of shipping interests, it is now common practice to allow shippers to have stakes in terminals. This is the case even in the highly efficient state-owned Port of Singapore.

For over two decades, parts of the Port of Colombo have been privately operated based on long-term contracts. Some of the members of the consortium that invested in SAGT in 1999 are foreign. CICT, the terminal showed the best performance, is at $ 600 million, one of the largest Chinese investments. It has been operational since 2013. The relationships leveraged by those companies and the efficiencies they have introduced have contributed to the Port of Colombo flourishing even when the Indian economy slowed down.

This experience alone should give comfort to those concerned about foreign investment in Sri Lanka’s infrastructure. The land is here, the millions of dollars in investment is fixed to that land and cannot be taken away, and the market relationships and skills the investors have brought have caused the entire port to improve. Sri Lanka earns from the export of port services, those who work for the partially foreign-owned companies make a good living, they all pay taxes, and the national economy benefits by having the 25th largest port in the world with direct sailings to key markets. A true patriot will understand that foreign investments in commercial enterprises are superior to foreign loans. In the former, the risks are shared. If the investment does not make profits, the foreign investor too is out of pocket. Thus, the investor has the incentive to make the business succeed. This is not the case when loans are taken to build and operate infrastructure on our own to satisfy some atavistic yearning. With loans, the risks are all on our side. Whether the business succeeds or not, the loan must be repaid. If something goes wrong, as has been repeatedly the case with the Norochcholai electricity generators built with Chinese loans, The China Ex-Im Bank does not suffer. Only we do.

So, a true patriot will not only understand the nature of modern port operations and the difference between loans and investment. She will also understand the geopolitical context and support the taking of precautionary measures to build the confidence of major actors such as India who can easily stymie efforts to advance the well-being of our citizens and reduce the harms that may befall them. A true patriot will support the government in its efforts to honour legal commitments and strengthen Sri Lanka’s most important relationship, that with our giant and proximate neighbour.

Rohan Samarajiva is founding Chair of LIRNEasia, an ICT policy and regulation think tank active across emerging Asia and the Pacific. He was CEO from 2004 to 2012. He is also an advisor to the Advocata Institute.

The pre-election opportunity ECT presents the President

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Dhananath Fernando and Shanaka Paththinigama

The East Container Terminal (ECT) has come into the limelight again.

Last week, a strike was ongoing by trade unions demanding to install gantry cranes, which were ordered a few years ago and which are now in the Colombo Port, at the ECT.

This was followed up with the Cabinet Spokesperson stating that it was “allowing the respective line Minister to conduct discussions at a diplomatic level on changing (the) Colombo Port Terminal deal with India and Japan”, according to Hellenic Shipping News Worldwide.

Subsequently, the Gantry Cranes were permitted to be unloaded and installed on the instructions of Prime Minister Mahinda Rajapaksa and the port workers decided to call off their strike on Thursday (2).

The fact of the matter is that the ECT is one absolute failure in terms of “getting things done”. Sri Lanka has been running it continuously and like many other economic issues, we have failed at getting our act together. This is despite being located at the heart of a strategic maritime route. Rather than taking advantage and converting the ECT to an operational level, we have lost a reasonable amount of credibility in the business world by opening the ECT for bidding and cancelling the bidding process on multiple occasions, thereby creating years of operational delays based on political favours. We hope, at least this time, Sri Lanka will be able to convert shop talk into actionable outcomes.

Understanding the shipping business

The shipping business is a technical subject and is very complicated. Ports are strategic geographical locations which are situated at the edge of oceans, seas, rivers, or lakes. These locations are then developed to provide facilities for the loading and unloading of cargo ships. The facilities provided for a port depends on the purpose for which the port is being used. A terminal refers to the set of facilities at a port where the loading and unloading of the cargo/container takes place. Terminals are named on the basis of the type of cargo that can be handled by it. Some of the most common types of terminals are container terminals, bulk cargo terminals, and LNG (liquefied natural gas) terminals.

Simply put, in one port, there are multiple terminals and the Port of Colombo has a few container terminals (CICT – Colombo International Container Terminal, JCT – Jaya Container Terminal, SAGT – South Asia Gateway Terminal, and UCT – Unity Container Terminal).

Global trade and most merchandise exports and imports account for a greater share of container terminals. The main factor that drives this business is efficiency and the networking ability to bring as many vessels as possible to the respective terminal. Simply put, when a ship enters the port/terminal how fast we can handle the containers and cargo (efficiency) and how networked we are to bring more vessels into the terminal are the two main determinants of making the business profitable.

Like most businesses, the price or the cost is a key determinant. To be profitable and bring the price down, over the years, shipping vessels have advanced to a point where there is capacity of more than 10,000 TEUs (20-foot equivalent units) in one vessel and those models (New Panamax – 12,500 TEUs | Triple E – 18,000 TEUs) have become popular with the development of global trade. These gigantic vessels can only be managed by deepwater ports which have a depth of more than 18 metres.

What’s all the fuss about the ECT?

There are two deepwater ports in the Colombo Port. One is CICT (85% owned by the China Merchant Port Holdings [for a period of 35 years, starting in 2013] and 15% by the Sri Lanka Ports Authority [SLPA] [owned by the Government]), which contributes to a higher share of the capacity and efficiency of the Colombo Port. The other deepwater terminal is the ECT. This is why the level of interest in this port is very high.

Geopolitical rivalries China, Japan, and India continue to seek operational ownership of the ECT through companies of their respective countries. The JCT (owned by the SLPA), SAGT (owned by John Keells Holdings – 42% , Mearsk – 26%, SLPA – 15%, A.P. Moller – 7%, Evergreen – 5%, and other investors – 5%), and UCT (owned by SLPA) are all shallow-water port terminals which can only handle smaller vessels (not economical compared to larger vessels) with about 10,000 TEUs capacity.

The ECT’s value is very high as it’s the only other deepwater terminal in the Port of Colombo except for CICT. As an additional benefit, it is located in the middle of the old port and the modern port, providing an added advantage for the movement of inter-terminal cargo, given its proximity to other terminals.

Despite the ECT having significant strategic value, consecutive governments have been just sitting on this, calling for bids and cancelling them, while competition is increasing every day – notably, the new Sagarala port development initiative by India, the construction of the Enayam Port in nearby Tamil Nadu, and also the Kerala Port, which is soon to be the world’s deepest multipurpose port.

With the agreement with SAGT due to expire in 2030 and with India developing their ports, the ECT has become a vital business asset as never before. Another deepwater port terminal operator adjacent to CICT will create more competition. However, the networking and other variables will matter to whoever gets the bid for the ECT.

At the same time, with the growth of global trade (not considering the effects of Covid-19), the Colombo Port is nearing full capacity of handling containers. The Port of Colombo moved to the top position of the Fastest Growing Port Index in the first half of 2018 by industry analyst Alphaliner and is one of the most connected ports in the entire world, handling about seven million TEUs in total. It is vital that the ECT is developed to maintain this growth.

Despite being situated in the centre of the Indian Ocean, and even though we are one of the most connected ports in the world, we are far from becoming a maritime hub. The root cause lies in our inability to be competitive and inadequacy to provide ancillary services such as logistics, bunkering, marine lubricants, fresh water supply, offshore supplies and ship chandelling, warehousing, and many more.

Our rules, regulations, and legal structures on the ownership of some shipping-related services and excessive government intervention, with the government acting as a player in the market and a regulator at the same time, has closed the space for private investment which could propel the Colombo Port to becoming a key global player.

Most experts have become weary of speaking about the same issues, while the opportunity of becoming a maritime hub in the Indian Ocean is slipping out of our hands.

Since the shipping business is based on efficiency and networking, the ECT has to be operated by a private operator and the Government should play a regulatory role and facilitate businesses by being the landlord of the port. This must be done while keeping the ownership of the port rather than trying to engage in the business and be a container terminal operator. Container terminal operation requires sizable capital investments. Private investments, which take the risk for the capital they invest, is the only possible way to create the right incentive structure and create the drive for efficiency and a very competitive business model.

Selecting a good terminal operator

After going back and forth, the previous Government signed a Memorandum of Co-operation (MoC) between Sri Lanka, India, and Japan. According to media reports, the current Government expects to discuss changes to the initial agreement, claiming that the previous deal was unfavourable for the country, and move to a new agreement.

At the same time, the SLPA unions claim that gantry cranes worth $ 25.7 million have been purchased for the development of the ECT, but concerns have been raised over the specifications of the cranes.

We really don’t know the truth

However, His Excellency the President, who received 6.9 million votes for a system change, should explore a method to select a proper operator. Undoubtedly, rather than handpicking operators based on introductions given by individuals, it has to be on a competitive bidding process, based on cost and pricing to ensure the competitiveness of the port with proper specifications. That’s the best system we can employ to find the most suited operator in a price-competitive industry.

Generally, Build-Operate-Transfer (BOT) agreements are provided with long tax holidays and the taxpayer has to be protected and prioritised as it is the people who gave the mandate for a system change.

At the same time, when the existing terminal operators bid for the project, their existing capacities and advantages need to be reflected in their pricing, investment, and proposal structure. The system change expected by the taxpayer, in this case, is to set up a system to ensure accountability and that things get done while getting the maximum benefit to the port and by establishing a level playing field for businesses and investors.

In countries like Sri Lanka where discussions revolve around high-value government transactions, there is a higher risk of such projects being influenced by many powerful businessmen and bureaucrats, leading to irregularities and corruption.

The President and the Government now have an opportunity to prove such assumptions wrong and set a prime example of how such a high-level transaction can be transparently managed. A single transaction with a conflict of interest can make a regime unpopular faster than anyone can expect. The Central Bank Bond irregularity is the most recent example.

On the verge of a crucial election and with the prospect of forming a fresh government, we hope Sri Lanka would move forward instead of dragging its feet on the ECT by ensuring and implementing a competitive bidding process (which will help avoid most of the geopolitical pressures) without getting sandwiched in between two global economic powers vying for regional dominance.

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.

Are Japan and India taking over the Colombo Port?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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By Nishtha Chadha

Negotiations on the Colombo Port’s East Container Terminal (ECT) have certainly racked up their fair share of controversy over the last year. Infamous for the onslaught of last year’s political crisis, the ECT presents one of Sri Lanka’s greatest economic and geopolitical opportunities due to its prime position and immense untapped capacity. The recent ECT Memorandum of Cooperation (MoC) signed between Sri Lanka, Japan, and India is no exception. The agreement reignited hardline nationalistic debates from trade unions and recurring spates of “Indo-phobia”. JVP Leader Anura Kumara Dissanayaka even equated the move to selling off national resources as ransoms, which threaten the national security and economic sovereignty of the country. But such hardline opposition to the agreement begs the question: What exactly is being given up?

What’s in the Memorandum of Cooperation?

According to the Sri Lanka Ports Authority (SLPA), the MoC states that the SLPA retains 100% ownership of the East Container Terminal. The Terminal Operations Company (TOC), which will be responsible for all operations within the terminal, will be jointly owned by Sri Lanka, Japan, and India. Sri Lanka will maintain a 51% stake in the company, while Japan and India will hold minority stakes of 34% and 15%, respectively. Development of the ECT will be financed by Japan through a 40-year soft loan of between $ 500-800 million. The loan will be at a 0.1% interest rate with a grace period of 10 years. The SLPA boasted the terms as one of the best agreements it has ever negotiated.

So, why is the ECT so important?

Estimates suggest that within the next three decades, over 45% of global GDP and trade will emanate from the Asia-Pacific region. At the heart of the Indian Ocean, the Colombo Port is in prime position to enjoy the lion’s share of this predicted growth. Ranked 11th in connectivity and 22nd amongst global ports, demand for the port is increasing steadily, and so is its competition. As the Colombo Port’s three current operational terminals, the Jaya Container Terminal (JCT), South Asia Gateway Terminal (SAGT), and Colombo International Container Terminal (CICT) struggle to meet capacity demands, the development of the ECT has certainly become a matter of urgency.

India’s new Sagarmala port development initiative also escalated anxiety amongst policymakers about potential loss in business, as over 70% of transhipment that passes through the Colombo Port is linked to India. Construction of the Enayam Port in nearby Tamil Nadu and the Kerala port, which is soon to be world’s deepest multipurpose port, suggest an explicit and pressing need for Sri Lanka to diversify its partners in the shipping business to keep the Colombo Port competitive. The best way to do this is to implement incentives for new investment, upgrade ancillary services for current and prospective consumers, increase efficiency to facilitate quicker turnovers, and expand berthing capacity to meet growing demand.

Why can’t the SLPA just develop the terminal?

Indeed, the largest opposition to the agreement has been the argument that if the SLPA is fit to develop the ECT itself, why is the Government getting other partners involved? However, the capacity of the SLPA to complete these development activities is more than dubious.

Though the SLPA has been one of the few state-owned enterprises able to recover any semblance of profit in recent years, it is also suffering from serious decline. According to the Ministry of Finance’s 2018 Annual Report, the SLPA saw its profit after tax reduce by 88%, from Rs. 12 billion in 2017 to Rs. 1.4 billion in 2018. This is in addition to total expenditure of the authority increasing by 5.5%, from Rs. 28.5 billion in 2017 to Rs. 30 billion in 2018. Moreover, if one interrogates the sources of this profit, it becomes painstakingly clear that the only reason the SLPA is even able to recover “net profit” in the first place is because of the high performance of its privately run terminals, the SAGT and CICT, which markedly outperform the SLPA-run JCT. The authority is bloated, unproductive, and cannot specialise in service provisions the same way that private operators are be able to.

The Government itself has even admitted that the SLPA does not have the funds or capacity to undertake the required development activities within the time period or at the scale required. The recent Easter attacks, combined with the last 12 months of political turbulence, have tightened budgetary constraints and fiscal burdens on the national economy. As such, the optimal solution to Sri Lanka’s rising economic maladies is to capitalise on national assets by trying to attract external investment capital and improve efficiency. The liberalisation of port practices and the introduction of competition to the industry is an avenue worth pursuing. Given the importance of the port to Sri Lanka’s participation in international trade, the objective of the management system should be to achieve efficiency gains and generate new traffic in the ECT. This can only be done by improving service offerings and removing bureaucratic impediments, not coddling trade unions and stifling economic potential.

The fact that the SLPA retains a 51% stake in the TOC is a cause for concern in itself. The SLPA should not be playing the role of both a service provider and a regulator. This severe conflict of interest not only undermines competitive neutrality, but also consumer confidence. Instead, as the sole owner of the port, the authority should be transitioning its role into one of a landlord, responsible only for monitoring port performance and the enforcement of regulatory standards.

A step in the right direction

While the agreement on the ECT is not perfect, it is a step in the right direction. The dream of becoming Asia’s next maritime hub is not far-fetched for Sri Lanka, but it will only be possible with the right reforms in place and an honest openness to foreign participation. Time and again, we have seen global supply chains expand domestic markets, and there is no reason for Sri Lanka to miss out.

The performance of the SAGT and CICT have proven Colombo’s maritime potential, and it is time the Government made a concerted effort to achieve this. Sri Lanka has approximately 750 local shipping, freight forwarding, and clearing agents, but this is minuscule in comparison to Singapore’s 5,000. In order to make the most of the ECT’s capability, Sri Lanka needs to implement supplementary reforms that will attract leading shipping companies to bring their business to Sri Lanka and set up regional hubs for operations. This includes creating a stringent and transparent regulatory environment, as well as significantly reducing the bureaucratic and financial barriers that currently deter prospective stakeholders.

It is important to understand that maintaining economic sovereignty does not come from shutting out foreign capital and deep-diving into protectionist policies that accelerate economic decline; but rather, from capitalising on strategic opportunities that promote increased employment and growth, which thereby translate into economic agency. The Colombo Port is ripe for growth potential, and the Government should be proactive in implementing key reforms that will transform Sri Lanka into the maritime hub it seeks to be.

Can the ECT buoy the Colombo Port?

In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.

Originally appeared on The Morning

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Sri Lanka’s location at the midpoint of international trade routes, positioned at the centre of the Indian Ocean, is a fact that we probably know by heart. But what’s important is the question whether we are exploiting this position. Our ports and good policy decisions are the tools that allow us to change geography into tangible benefits. The performance of the Colombo Port has been exemplary. It recently handled its seven millionth container and was ranked the fastest-growing port in 2018. However, with the Colombo Port operating at approximately an 80% capacity, this growth and the benefits it brings have an expiration date.

What is the ideal role of the government in the shipping industry?
The government should most definitely not be both a player and a regulator. Right now, the Government plays both roles, and the potential for a conflict of interest is enormous. It also means that it is increasingly difficult for competitive neutrality to be maintained. However, the government should not be completely removed from the industry. The role of the government lies solely in being a landlord and regulator, for if the Colombo Port is to grow while remaining efficient and profitable, regulation is required to address anti-competitive practices, monitor performance, and enforce standards. Of course, when advocating for government regulation, one wants to steer clear of the miles of red tape that the government is fond of. A caveat of this argument is that a balance be struck, so that regulation does not stifle innovation or investment.

What makes economic sense?
Establishing the hard and soft infrastructure a port requires is a capital and time-intensive task. There also needs to be strong commitment, which the Government lacks. Colombo International Container Terminal (CICT), which is a joint venture between China Merchants Port Holdings Company Ltd. and the Sri Lanka Ports Authority (SLPA), signed a BOT agreement in 2011. The terminal was operational by 2013. In comparison, the construction of the breakwater for the Jaya Container Terminal (JCT) run by the SLPA took four years, from 2008 to 2012. CICT developed an entire terminal in less time than it took the SLPA to construct the breakwater for its existing terminal.

Lack of direction and consensus from decision makers in government have resulted in the East Container Terminal (ECT) – a strategically important terminal remaining unused and idle. It is clear that the Government needs to step aside and allow the private sector to come in. This is evidenced by the performance of the South Asia Gateway Terminal (SAGT), which is operated on a BOT basis with the Government of Sri Lanka and a consortium of local and international establishments, which was awarded the “Best Terminal in the Indian Subcontinent Region” for the third consecutive year in 2019 and won the “Best Transhipment Hub Port Terminal of the year” at the Global Ports Forum.

Percentage change in TEU handling from 2016 to 2017 (Source: Ministry of Ports and Shipping, Performance Report (2017), compiled by the Advocata Institute)

When comparing the success of the different terminals, the same conclusion can be drawn. Looking at the comparison of the number of Twenty-foot Equivalent Units (TEUs) handled by the terminals from 2016 to 2017, the CICT is the best performer. Interestingly, while both SAGT and CICT have enjoyed an increase of 10.9% and 19.3% in TEU for 2017, JCT has witnessed a 4.3% drop. The privately-operated terminals outperforming the SLPA Jaya Terminal speaks volumes.

“Seaports are interfaces between several modes of transport, and thus they are centers for combined transport … they are multi-functional markets and industrial areas where goods are not only in transit, but they are also sorted, manufactured and distributed. As a matter of fact, seaports are multi-dimensional systems, which must be integrated within logistic chains to fulfill properly their functions.”

— United Nations Conference on Trade and Development

Ripple effects of private ownership

This definition by the United Nations Conference on Trade and Development succinctly describes the importance of ports and port infrastructure, and accurately shows how ports cannot work in silos. They are an integral component in a wider network of business, infrastructure, supply chains and employment. If we want profitable and efficient ports, we need similarly performing ancillary services.

Ancillary services and ports enjoy a symbiotic relationship. On one hand, ancillary services are series of economic activities which provide services and create employment; which are dependent on the port. On the other hand, the port benefits from efficient ancillary services as they make the port and its terminals more attractive to clients and boosts its own performance.

Ancillary services include logistics, bunkering, marine lubricants, freshwater supply, off shore supplies and ship chandelling, warehousing and many more. These services, and their ability to grow is affected by the general functioning of the port, and therefore is affected by the ownership of the terminals.

For a port to survive, ancillary services need to constantly innovate and remain productive. There is no need for this article to expound on how the government is not the place to go to when in search of innovation. This is clearly the forte of the private sector. This is backed up by the fact that so far, private ownership of terminals and profitability go hand in hand. In short, if profitable and productive terminal creates a well-functioning port, allowing ancillary services to grow; then we should be looking to the private sector for investment and not the government.

What is happening with the ECT?

As mentioned above, the Colombo Port is fast growing. However, if you were to look at the Colombo Port from one of the many high rises in the Fort area, spotting the East Container Terminal would not be difficult – it’s the only terminal with nothing happening. No cranes, no ships, no activity.

The East Container Terminal is not significant simply for its disuse. Compared to the West Terminal, it is situated in the middle of the new port and the old port of Colombo. This gives it an advantage as it is closer to all other terminals and moves inter-terminal cargo a smaller distance. This gives it an important edge as inter-terminal cargo is an important component of transshipment. The depth of the ECT, at 18m allows it to handle container shipments, adding to its value. In short, the ECT has a clear operational advantage.

It is evident that the country has lost out in this scenario. In a port that is as fast growing as the Colombo port, the decision makers of this country have, for a variety of reasons, not developed the ECT. The Sri Lankan government has taken many stances over the years. It both invited expressions of interest and business proposals for the development of the ECT and cancelled tenders, insistent that the ECT will be run by the Sri Lanka Ports Authority – sending mixed signals to interested parties, and effectively ensuring that investors are reticent, and development of the port has stalled.

Politics have dictated the government’s decisions on the ECT, and the result is that the country has lost out. In shipping the government has an important role to play in regulation and ensuring standards are adhered to, but it cannot be both a player and a regulator. The performance of the JCT in comparison to the private terminals makes it clear that government is not as effective as the private sector, it should limit itself to the task of regulation. In conclusion, the ECT should be opened for private ownership as soon as possible, following the precedent set by the BOT models of the CICT and SAGT.

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Aneetha Warusavitarana is a Research Analyst at the Advocata Institute. Advocata is an independent policy think tank based in Colombo, Sri Lanka. They conduct research, provide commentary, and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. She can be contacted at aneetha@advocata.org or @AneethaW on twitter .