Import controls: Didn’t work in 2020, won’t work in 2022

Originally appeared on The Morning

By Dhananath Fernando

When I was a university student in my final year, I did an internship at one of the leading garment companies in Sri Lanka. My internship stipend was Rs. 5,500 per month, and I worked in Nittambuwa. 

On the weekly payday, it was a tradition that I would bring a small, affordable treat home. Of course, in those days the value of Rs. 5,500 and the purchasing power of the rupee was better than it is today. When my bus reached Pettah station (my interchange for the next bus to my home in Moratuwa), I would walk through the local market. What I could afford to buy from my stipend were fruits like apples, oranges, and grapes that were sold on the market sidewalks, and I would purchase a few of each variety. 

I recalled those days when I heard that the Government would be imposing licensing requirements for the import of 367 products, including apples and oranges. It occurred to me that many of the small traders who used to sell me those fruits would probably go out of business. Furthermore, the consumers who enjoyed affordable sources of fruit may lose access too.

There appears to be a widespread misconception that fruits like apples and oranges are only consumed by the wealthy elite. If they were only consumed by wealthy people, they of course would not be sold on the Pettah pavements and at central bus stands in Colombo and across the country.

The fundamental logic that is important to understand is that we cannot categorise any product as ‘essential’ or ‘non-essential’ in the first place. Different products are essential to different people based on a multitude of factors. 

A particular type of fruit like apples may not be essential to me, as I prefer to eat mangoes instead of apples. But from the perspective of an entrepreneur who was making apple juice or apple vinegar in Sri Lanka, apples cannot be substituted with mangoes. It is very likely that they will go out of business. 

Licensing process

According to the new regulations, the importers of 367 product categories have to obtain a licence for importation. Imposing such a licensing process will undoubtedly lead to corruption.  This move will ultimately only allow people in well-connected elite circles with contacts amongst Customs officers and politicians to obtain the import licences. The small-scale importer will be hit the hardest.

All big industries that require a licence have been taken over by politically-connected individuals. For example, private buses require a licence or a route permit. As the route permit is more expensive than the vehicle itself, buses tend to be poorly maintained, which puts passengers and other road users at risk.

The need for a licence to sell liquor is another example: most of the liquor licences of any given electorate tend to be owned by ruling and Opposition MPs, their family members, or allies.

Similarly, licences for Ceylon Petroleum Corporation-owned filling stations and State-owned LP gas distribution (and many other industries that require licences) have been completely overtaken by politically-connected individuals and most areas have minimal competition as a result.

Even obtaining the licence or approval that is required for basic house construction is a very cumbersome process and is greatly influenced by bribery and corruption.

Furthermore, the prices of many of the newly-affected products will go up. The few people who have the licence will have controlling power over the pricing and will effectively monopolise the industry. 

Imports are not the problem

To think that imports are the cause of the present USD shortage is a completely inaccurate diagnosis of Sri Lanka’s economic situation. 

As the Advocata Institute has explained many times, higher rates of imports have been caused by a reckless monetary policy, including quantitative easing and low-interest rates. Our imports have been declining as a percentage of GDP for the last 30 years, as have our exports. Therefore, thinking that imports are the fundamental problem is a complete misconception.

However, the Government and the Central Bank have recently been taking measures which are steps in the right direction. Increasing interest rates and floating the currency are appropriate in the current context, given the balance of payment crisis the country is undergoing. 

Ideally, interest rates have to be low and the currency has to be strong, but both can happen with time by allowing market forces to work. It is clear that the value of the currency cannot be maintained by forceful intervention. 

However, currency depreciation and higher interest rates will affect citizens in multiple ways. Depreciating the currency will cause inflation rates, which is about 14.2% (CPI, January 2022), and prices of most essentials and non-essentials to spike dramatically. 

Increasing interest rates will encourage people to save more than they spend, so the cost of capital will be high and the economy will be slowed down. Hence, growth will be low. It’s a choice between two equally-difficult options.

Our policymakers should understand that imports are not the problem. The real problem is that we haven’t carried out any reforms to improve the productivity and efficiency of the economy. Until the Government identifies the existence of a problem and takes the necessary actions to rectify it, we will not be able to overcome this crisis.

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.

Fuelling reform

Originally appeared on The Morning

By Dhananath Fernando

Fuel shortages have become abundant. The implications of these shortages need no lengthy explanations. They will affect all of us: from a multinational company to the average man on the street, every action we take in life will be disturbed. The electrical grid is already experiencing multi-hour, island-wide blackouts and the situation could escalate to include water supply and many other utilities, for which the knock-on effect will be very severe. 

There were serious discussions in Parliament about the possibility of revising fuel prices. In fact, the CBSL Governor himself has requested that prices be increased. When fuel prices are increased, it may (to an extent) reduce the demand for fuel. But fuel is such an essential commodity that even when prices are increased, the drop in demand may be low. But when fuel prices are increased, people will have to spend more money on fuel and related products, hence there will be less money being spent on non-fuel imports. As the non-fuel imports come down, the balance of payments will come closer to equilibrium, reducing the extent of that crisis. Ultimately, that’s the fundamental feature of a market system.

Fuel price revisions have never been popular in Sri Lanka, as historically, revisions have always led to price increases. When the former Finance Minister late Mangala Samaraweera announced the price formula along with his team including the present Finance Ministry Secretary Dr. S.R. Attygalle, many people did not see the fuel pricing formula positively. 

In my opinion, the optics and launching the formula were also quite bad in the context of a political economy. The formula was introduced at a time when global crude oil prices were increasing, so many people thought the price formula was just an attempt – or an excuse – to increase the price rather than the proper market mechanism. At launch the officials were laughing and it was launched as V1+V2+V3 = V4 and it was captured in the media and popular rhetoric that policymakers were having fun by increasing the burden on poor people. So while the decision to implement the formula was appropriate, the marketing and getting the public on board with market-based pricing could have been better. Later on, with elections getting closer, adherence to the price formula was not maintained. But market-based pricing of fuel is definitely a need for the ailing Sri Lankan economy. 

It is crystal clear that we are unable to sell fuel at lower prices than the cost of production and distribution without incurring heavy losses and debts. The Ceylon Petroleum Corporation (CPC) makes a loss of Rs. 46.80 per for every litre of diesel even after receiving a duty waiver of Rs. 25. For petrol following a duty waiver of Rs. 45 the CPC makes a loss of about Rs. 18. 37. 

After the fuel shortage became prevalent, the common excuse trotted out by policymakers is that they don’t have dollars to buy fuel. In my view, this is misleading. While it is true that we do not have dollars to buy fuel at the soft-peg rate of approximately Rs. 200 per USD, we may have USD to buy fuel at the market rate of about Rs. 250-260 per dollar. Interestingly, we do not need the assistance of the International Monetary Fund (IMF) to make these little changes with a big impact. Increasing domestic fuel prices may reduce the losses of CPC, but it will not solve the underlying problems causing shortages. Currently our Government makes two main losses on every litre of petrol or diesel: first, it suffers an operational loss on subsidised fuel and secondly, it suffers an exchange rate loss.

While the main reason for the current crisis is shortage of USD, it should be noted that the energy market dynamics are also very weak. It’s a duopoly market with over 80% share for the State-owned CPC, one of the biggest loss-making State-owned enterprises in the nation. As per sales for 2020 of diesel, because of the duty waiver alone, the Government is losing out on about Rs. 30 billion in revenue for petrol and about Rs. 98 billion for diesel. 

It is simply not worth making such losses, making life inconvenient for consumers while also losing political capital at the same time. There is no winner when the State tries to keep fuel prices low. Claiming that our prices are low doesn’t really matter when we have no fuel available at all! So although it is not a popular decision, the right and rational decision is to determine the price based on market forces. Also, the entry barriers have to be reduced or eliminated to allow other players to enter the market. Singapore, a smaller country with a population less than a quarter of Sri Lanka’s, has more fuel and energy suppliers, ensuring price and supply stability.

Rather than merely providing excuses as to why we do not have USD to buy fuel, the Government can identify the price at which it can make the USD available for our fuel imports. Long-term reforms are the only solution for this problem. Emerging from our economic strife is determined by when we start our reforms programme. It’s better for everyone that we start sooner than later. 

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.

Price controls worsen drug shortage

Originally appeared on The Morning

By Dhananath Fernando

Shortages have now become abundant and the new normal. We all know the reason: the foreign exchange shortage that is causing shortages of many essential and non-essential goods. Shortages have even affected our basic essentials, such as fuel and electricity.

We all know the solutions for the problems as well. Unfortunately, we have a shortage of policymakers who have the courage to enact the reforms to rescue our people from the commodity shortages. 

There are many contributing factors to potential shortages: supply chain disruptions, natural disasters, and many other externalities. However, in the Sri Lankan context, it is primarily price controls that are causing shortages. 

When there were price controls on tinned fish, there was a shortage of tinned fish. We had a controlled price for dhal, and dhal disappeared from the market. Cement prices were controlled and we experienced a cement shortage. The same has happened for US Dollars (USD). The Government controlled the price of USD, and the country has a shortage of USD. However, the USD problem is somewhat more complicated as price controls are just one of the reasons for the shortage. Controlling the price of the dollar has the worst effects of all the price controls as it has repercussions on all imports and exports.

As a result of the deteriorating situation, the Government removed price controls on most items which is commendable. It was clearly the right thing to do. Cement, milk powder, and many other commodities removed their price controls. But controls remained in a few very important categories: most significantly, USD and pharmaceuticals. The dollar shortage is worsening the shortages in all other industries and pharmaceutical shortages are creating a nightmare for many patients and their families. Even shortages of basic medicines such as the painkiller paracetamol have been reported. Although it was reported that the demand has increased by more than 200% due to Covid and Dengue, in a market system paracetamol cannot suffer shortages unless there is an economic issue (1).

One of my relatives has a rare type of pneumonia, and only one drug brand is effective in treating it. Since the disease is rare, only a small quantity of that particular drug was imported. Now with dollar shortages and delays in opening Letters of Credit (LCs), that particular drug is of less priority to the drug importer, as the same dollars could have been utilised to import more profitable drugs. 

On the other hand, there are price controls on some drugs and pharmaceuticals. As a result, when the prices have increased, no businesses would have the incentive to import them, as they would be engaging in a business where the cost is higher than the selling price (or where the profit margins are so razor-thin that investment is not justified).

Additionally, pharmaceutical prices and some active pharmaceutical ingredient prices have increased due to the pandemic and resulting supply chain interruptions. Simply maintaining rigid price controls doesn’t make economic sense and it only causes shortages in the market. It even makes the situation worse for local manufacturers, who find it difficult to source raw materials/ingredients. The State Pharmaceutical Corporation (SPC) can survive, because it’s a government institute, and it will receive preferential treatment from the State banks in opening LCs and will receive subsidies from the taxpayer. 

In the case of private companies, the importation of drugs and active pharmaceutical agents are conducted through long-term contracts. If LCs cannot be honoured or opened, both their professional business relationships and the reliability of supply will be affected. Sometimes with changes in credit periods, cost factors will change. This will occur particularly when there are doubts in the market on the exchange rate. In today’s Sri Lanka, where the kerb/black market rate is 20-30% higher than the rate offered by banks, the cost of imports is obviously going to be higher. 

Price controls on pharma are going to create shortages of the drugs that we depend on, as we have already experienced with products including tinned fish, dhal, milk powder, and cement. 

Due to shortages of USD and difficulties in opening LCs, even without price controls it will be difficult to avoid shortages. The main reason is that 2022’s entire global economy is connected through the dollar alone. In such a context, price controls are just going to make the problem worse. 

It is understandable from the Government’s point of view that allowing a sudden price increase of pharma products may not be politically feasible. But it may have a more significant political impact if the products are simply not available on the market. As with oil products, we could have aligned the prices slowly at regular intervals so that the price hikes would be more digestible for the average citizen and therefore less politically damaging. If we had enacted price revisions that aligned with global market prices we may not be where we are today. That is why the market system depends on the price mechanism – it is the thermometer which balances supply and demand. 

For a market system, competition comes before regulation. Imports and exports must work together at full capacity for prices to come down. Therefore, the regulatory framework has to be managed in a way that allows market forces to work. 

When the Board of Investment was positioned as a ‘One Stop Shop,’ there was a joke among the business community that “It’s one more stop” would be more apt. Similarly, the National Medicines Regulatory Authority (NMRA) – supposed to be the regulator of prices and quality of medicines and medical equipment – has simply added a severe burden to the process rather than making it easier. 

References:

• https://ceylontoday.lk/index.php/news/paracetamol-demand-up-275

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.

Government must resign itself to reforms – now

Originally appeared on The Morning

By Dhananath Fernando

My school Advanced Level biology teacher used to tell me how to study for exams. Her main advice was that the first step was to ‘make a decision to study’. I would think to myself, ‘Haven’t we all decided that we need to study?’ 

But she would explain the power of decision making, which applied everytime we make a decision – be it consciously or unconsciously – and mention life every time we had to make a decision: “Not making a decision is a decision. Thinking to ourselves to study later is also a decision. Studying now is a decision. Not studying is also a decision.” 

I realised that it’s all about the thousands of decisions that we make everyday. All of our destinations will be determined by such small decisions. What we are today is based on the decisions that we made in the past; what we will be tomorrow is based on decisions we make today.

The same lesson applies to our economic policy as well. It appears that our policymakers have made a decision to not make any decisions on the public policy front. Since the initial stages of Covid-19, multiple reports have been submitted by experts and the Government has even called for multiple reports on the current economic situation. There was an initial report by the Pathfinder Foundation which focused solely on the pandemic. Then a ‘Road Map for Economic Recovery’ was launched by the Advocata Institute. 

In fact, the President called for a deregulation report, which was chaired by Krishan Balendran and Lalith Weeratunga. Suggestions were handed over by the Delegation of German Industry and Commerce (1) to the Deregulation Committee. There were many other suggestions and ideas by many other stakeholders, including the Chamber of Commerce, on the brewing economic crisis. It was recently reported that the Pathfinder Foundation submitted another report to the Minister of Finance based on the findings of a tripartite discussion between experts from Sri Lanka, Japan, and India. 

After all these suggestions, the decision to delay reforms may have multiple reasons, of which which we can only guess. But keeping assumptions aside, the more we delay, the closer we get pinned to the wall with limited choices to escape from the crisis.

Economic reforms must always be looked at in a political context. Whether the present political power balance supports the reforms is a key question. While many are of the view that with a two-thirds majority reforms can be done, it seems otherwise. Reforms are going to be quite painful so it seems that policymakers are reluctant to push hard reforms, as they are scared that the citizens’ frustration during the reform period may dilute the political capital they enjoy.  Further, this may even cause them to lose the super-majority. 

Even the Minister of Finance has admitted that the State sector and State-Owned Enterprises (SOEs) are a massive burden to Government coffers; yet no State sector reform programme is even on the table. Politics is obviously the concern of the Government and State sector employees and their families are a massive voter bloc. Some of them would lose their jobs or would be pushed into mandatory retirement which would not help politics at the ground level. So reforms are put on the back burner and the Government continues to procrastinate. 

On the other front, the more that we delay reforms, the more the people get frustrated with disturbances to their regular day-to-day activities and businesses, including shortages of essentials such as LP gas, fuel, milk powder, cement, etc. The Government is stuck between a rock and a hard place – whether it carries out reforms or not, its popular support and political capital will be diluted either way. Therefore, my view is that it is better to bite the bullet and carry out reforms, as procrastination is just going to make things worse in the long run.

Another reason that reforms are delayed could be that the energy and focus of policymakers and politicians is spent mainly on fire-fighting day-to-day micro-problems. The situation is such that everyday has become a challenge for the Government to find US Dollars for importing basics and debt repayments.

Weather conditions impacting hydropower generation and global crude oil prices reaching nearly $ 100 a barrel are making our crisis worse. So far our policymakers’ strategy has been to completely depend on swaps. 

Over the last few weeks, India provided us with swaps and credit lines worth $ 1.5 billion and China with another Yuan 10 billion (approximately $ 1.5 b), of which basic information such as interest rates and payment conditionality has yet to be published. Interestingly, the total amount of swaps and credit lines are equivalent to six times the value of the MCC Grant, which created an extensive social discussion on the attached binding conditions which caused the President to appoint a committee to evaluate the grant agreement.

But our economic crisis is such that we are extremely desperate for foreign exchange. We had a presidential commission for a mere $ 480 million grant at a time when people had a deeper sensitivity to the potential conditions, whereas now we have decided to borrow six times more than that without any political party, media, or public figure having voiced their concerns. 

The decisions available at hand for all political parties are limited and difficult. It has come down to simply having the courage to implement reforms. Politics or party lines have become irrelevant as the prescription will not change regardless of the person in the driver’s seat.

Since 1977 and 1990 there has been no effort for any hard economic reforms, so many policymakers think that hard reforms will dilute their popularity. As a result, procrastination on reforms has become the norm. At the same time, the practice and knowhow of driving reforms have not been common. But the truth is that reforms will have less damage on political capital, while not undertaking reforms will have far more serious consequences. Stagnation won’t take us anywhere, but reforms will. 

References

1 https://srilanka.ahk.de/aktuelles/news-details/handover-of-report-on-the-simplification-of-existing-laws-and-regulations-in-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.

The danger of being anchored in anti-competitive safety

Originally appeared on The Morning

By Dhananath Fernando

The ‘what not to do’ guide for Sri Lanka’s economy from its shipping sector

Once I met a businessman in one of the world’s largest waterproofing corporations, based in the United States. He spoke to me about his humble beginnings. I asked him what his secret for success was. He replied “market system and competition” with confidence. 

He explained that an average person like him was able to create such a large business and social impact which provides employment for thousands of people in just one generation solely because of the market system and competition. “The market system made me an innovative, hard working and a progressive person. I didn’t care about my background. Without competition I could have been the same person as I was 20 years ago,” he said.

In life, hard work and commitment are the basic requirements of prosperity. What we need is a system that rewards hard work and free exchange, so the market system can create progression and prosperity. In any sector when competition is restricted, stagnation is unavoidable. That is one of the main reasons why, in any advanced market system, institutions are built to promote competition and restrict anti-competitive practises such as monopolisation. 

In Sri Lanka our total factor productivity is very low compared to our regional players, due to lack of competition and anti-competitive business practises. Sri Lanka is ranked at 84th in the Global Competitiveness Index (out of 140 economies) while we were ranked 52 in the same index in 2012; clearly, the situation is only becoming more dire.

The shipping industry is just one prominent example of how the lack of competition and anti-competitive trade practises have made Sri Lankan industry stagnant over the decades. While Sri Lanka boasts of its strategic location, our growth has been far below potential for many decades now. We have not only failed at capitalising on our naturally-gifted location but we are mired in debate and friction due to anti-competitive trade practises and attempts to monopolise the shipping industry and supporting services.

Most protected industries and cartels practise  anti-competitive behaviour after a certain period of time, due to stagnation and poor productivity. In a competitive environment, businesses focus more on future opportunities and productivity improvement, than on defending their own interests even if it means resorting to anti-competitive practises. As the American sporting legend Tom Brady famously said: “While the winners are focused on winning, the losers focus on the winners.”

Sri Lanka is quite unfortunate as even shipping, a main sector where we have the opportunity to open up for competition, has fallen victim to protectionist and anti-competitive practises. Minister Vasudeva Nanayakkara filed a public litigation case on the monopolisation of the shipping industry when he was a member of the Joint Opposition during the last regime. However, the lack of regulation to avoid anti-competitive practises will provide very limited space for ordinary citizens to become aware of the extent of the problem. 

Attempts to eliminate minimum investment requirements on shipping industry and freight forwarding with the objective of bringing more competition has failed over the years due to industry resistance. 

The result is shown in the numbers: Sri Lanka has about 750 local shipping, freight forwarding, and clearing agents, whereas Singapore has about 5,000 – despite commencing on its journey to becoming a maritime hub several years after us. Even in the case of the X-Press Pearl environmental disaster, we really did not have the basic ecosystem in place to combat an emergency because of our anti-competitive, inward-looking approach. 

Of course, shipping is not the only industry closed for competition, with anti-competitive behaviour. The acquisition of two of the largest tile manufacturers in Sri Lanka, which operate in an industry that is already highly protected (at one point with 107% total tariff protection), has also been a concern. The result has been the continuous suffering of consumers and the construction industry over the years, with basic housing becoming almost a dream for aspirational Sri Lankans. 

According to the current regulation, the Consumer Affairs Authority (CAA) Act No. 09 of 2003 (which was brought after repealing the Fair Trading Commision [FTC] Act of 1987) is expected to promote competition. Unfortunately, the Act only sets price controls on selected consumer goods instead of truly promoting competition. They raid small mom-and-pop shops for selling goods at rates higher than the set prices, and cast a blind eye on all other anti-competitive behaviour. It should be noted, however, that the CAA is hindered by its limited purview on the Investigation of existence of monopolies, mergers and acquisitions, and anti-competitive practises. 

The previous FTC Act of 1987 had a broader purview to investigate anti-competitive trade practises (compared to current CAA) including agreements to limit production, refusal to prevent  predatory pricing, vertical agreements, and cartels. But the Fair Trade Commision Act lacked implementation guidelines and specific distinction between public and private sectors (1). Anti-competitive practises need to always be analysed with State-Owned Enterprises (SOEs) as most monopolies and anti-competitive practises are SOE driven.

Additionally, the provisions for the appointment and removal of members to the FTC, as well as the way the Act was implemented, raised concerns of the departure from competitive policy at the FTC (2).

A good example of the shortcomings of the FTC is the merger of Glaxo-Wellcome and SmithKline Beecham. FTC considered that it was beyond their purview as it was an international merger. In relation to unfair trade practises, the oft-cited case is that of Ceylon Oxygen Ltd. Ceylon Oxygen had held a dominant market position since 1936 in Sri Lanka. When a new firm named Industrial Gases (Pvt) Ltd. entered the market in 1993, it was alleged that Ceylon Oxygen behaved in predatory manner by reducing the deposit fee on canisters and decreasing maintenance charges, and made discriminatory discounts as well as discriminatory rebates. 

FTC identified  three anti-competitive practices of Ceylon Oxygen, namely, predatory pricing, discriminatory rebates, and excluding dealing. However, when the case went up to the Appeals Court, it was held that the FTC had no jurisdiction to investigate such practises over the case and therefore did not recognise these practises as preventing competition.

Though the FTC had its own shortcomings, the subsequent CAA Act has a far more limited purview. Simply put, Sri Lanka’s business environment and ecosystem are  set on all fronts to avoid competition and promote anti-competitive behaviour, while our prosperity completely depends on the opposite. 

Competition is very important to Micro-, Small- and Medium-Sized Enterprises. They are the first to adapt and grow due to flexibility and agility in a competitive environment. That is the reason the world-class waterproofing businessman whom I had met thanked competition and the market system for his success and the success of his business. 

If Sri Lanka is serious about achieving the status of a high income country, we can only get there by improving our productivity (total factor productivity) and certainly not through debt accumulation. Trade and competition policies play a pivotal role in this journey of reform and our policymakers should focus on implementing high-impact policies to promote competition and avoid anti-competitive behaviours. Unfortunately, the current focus has been on prices and market intervention.

Sri Lanka has a large number of talented young people who could become as successful as the waterproofing businessman I met. If we establish a market system and a competitive environment, then nothing will stand in the way of our youth reaching the top and Sri Lanka will become a far better and more prosperous nation than it is today.

References:

(1)  ​​Trade and Competition Policies: Their implications for productivity Growth in Sri Lanka by Dr.Sarath Rajapathirana

(2)  Thurairtnam (2006), Malathi Knight Jones (2002)

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.

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.

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 .