Colombo Port

Can the ECT buoy the Colombo Port?

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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)

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 Colombo Port

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 - FTDaily MirrorCeylon TodayThe IslandDaily 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.

The Colombo Port City: dealing with unsolicited proposals

By Ravi Ratnasabapathy

The Colombo Port City has generated a storm of criticism, the latest from the Friday Forum, which has called for systematic reviews of large state infrastructure projects. The Chinese Government is now reportedly weighing in on the side of the developer, The China Harbour Engineering Corporation.

Unsolicited proposals such as the Port City are controversial. How should a government deal with them? What should be done with the Port City project itself?

Public procurement, especially for infrastructure is a complex process. The general procedure is that a project, once identified and screened by the relevant line Ministry (in regard to the economic and financial viability), should be submitted to the Ministry of Finance for preliminary clearance. If Finance Ministry Clearance is obtained it must be submitted to the Cabinet for approval in principle. If this is obtained, the Finance Ministry will appoint a Project Committee to develop a detailed Request for Proposal (RFP).

The RFP is very important, since it is the foundation of the project. It spells out the project needs clearly and sets the framework within which competing bids can be evaluated. The RFP would include the following:

  1. Criteria of assessment of technical and financial viability of the project.

  2.  Details of specifications

  3. Models of relevant Agreements as decided on a case by case basis.

  4. Environmental data and information.

  5. Any other relevant information.

An unsolicited proposal bypasses this process of vetting, which means a bad project can get through. Therefore, traditionally unsolicited proposals were viewed with disfavour. The United Kingdom for example does not permit unsolicited projects.

Many of the world’s most controversial private infrastructure projects originated as unsolicited proposals, such as the Dabhol Power Plant in India and many independent power generation plants in Indonesia. In some countries private companies submitting unsolicited proposals often did so in an attempt to avoid a competitive process to determine the project developer. If successful, they were then able to finalise project details with the government through exclusive negotiations behind closed doors, which is also the case in Sri Lanka.

Should Sri Lanka bar unsolicited proposals?

There are positive aspects of unsolicited proposals. Sometimes such proposals are based on innovative ideas and it is useful to obtain external input in conceptualising, designing, and developing projects.

The difficulty is in getting the right balance between obtaining innovative project ideas without losing the transparency and efficiency of a competitive tender process.

Therefore a proper written policy is essential. At a minimum, the principle should be that all unsolicited proposals are channeled into a transparent, competitive process where challengers have a fair chance of winning the tender.  

There are two main approaches that have been developed to deal with unsolicited proposals. These are:

  1. In a formal bidding process, a predetermined bonus point is awarded to the original proponent of the project. Chile and the Republic of Korea have such a system. Problems may arise with definition of appropriate bonuses which is subjective and potentially open to manipulation.

  2. The Swiss challenge system in which other parties are invited to make better offers than the original proponent within a specified time period. If a better offer is received, the original proponent has the right to counter match any such better offer. This system is practiced in the Philippines, South Africa and Gujarat in India. This is the preferred option since it does not require further analysis or subjective decision making.

Either of the above approaches can work with proposals that are still on the drawing board. How do we deal with a project where work has already commenced such as the Colombo Port City where the developer has already spent a substantial amount of funds? It cannot simply be cancelled, despite various contradictory claims emanating from the sections of the Government, nor can be easily be opened to tender.

A Developers fee approach – where the project is opened to tender but development costs to date are reimbursed, either by the government or the winning bidder, could be a solution. There will be difficulties in assessing the costs and it is not certain whether either the Government or another developer would be willing to take it on, but at least opening up for tender will give us an idea of the alternatives available.

The project will initially need to be subjected to an independent technical review to ensure that concerns in areas such as water supply, sewage disposal and power have been addressed. The city of Colombo is already overloaded in all these respects, adding the strain of the port city to the crumbling infrastructure of the capital could take it to bursting point.

The environmental issues are another can of worms, from the supply to sand, to the damage to corals, impact on marine life to altering of tidal patterns that may cause coastal erosion elsewhere. A full independent review is needed.

If both areas of concern can be addressed then it may proceed, after being opened to tender as discussed above.  If the project cannot proceed there is another headache as to what to do with the partially built site-a separate study on the best alternate use is needed.

What is tragic is that all these problems could have been avoided. There were processes and institutions in place to ensure proper procurement, but they were abolished in 2007.

The National Procurement Agency (NPA) of Sri Lanka provided the general framework for handling unsolicited proposals. Written guidelines on unsolicited proposals were in place. All unsolicited proposals were to be dealt with through the Swiss Challenge system.

 Set up in 2004 by then president Chandrika Kumaratunga the NPA was shut down in December 2007. All the more reason that the proposals in hand should be channeled into a transparent, competitive process.