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.

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

---

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.

---

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 .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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