Budget repeats ‘over-zealous’ mistakes in logistics, transport: CILT

Dec 07, 2015 (LBO) – Sri Lanka’s budget proposals for 2016 repeat many of the mistakes in previous budgets in the areas of logistics and transportation, the Chartered Institute of Logistics and Transportation says in its budget analysis.

The institute said the “over-zealous” attitude to improve the road network is likely to continue with projects such as the proposed Ruwanpura expressway, when railway electrification should have been mentioned as a government priority.

“The continuing preference for single source contracts, lack of transparency and adherence to feasibility studies and dubious economic benefits of many of the proposed projects appear to continue,” the analysis said.

This will invariably “take away investment from critical infrastructure upgrades that have been highlighted in many studies,” the report said.

Sri Lanka’s government presented its budget for 2016 last month, under pressure to raise flagging state revenues, widen the tax base and reduce a recurring budget deficit.

Although the proposals are seen as business friendly, analysts have been sceptical of medium term fiscal consolidation plans.

The institute said there was no clear direction on how to improve the transportation sector.

Proposals to manufacture new buses from old bus chassis is not the best approach to modernize the fleet of buses, it said, and there should be incentives to import modern, low floor, environmentally friendly, low emission modern buses.

The Vehicle Emission Testing program even though somewhat flawed, is effective to curb pollution and there was no logic for increasing the fee to 5,000 rupees.

“It is encouraging to note that ‘Park and Ride’ facilities attached to both railway stations and bus stations have been mentioned. This is a meaningful initiative for which Rs 1 billion has been allocated.”

However the strategy of charging vehicles that do not carry 4 people is a failed strategy in many parts of the world, it said.

“Utilizing modern technology such as Electronic Road Pricing is essential if this is to be implemented practically. Moreover, public transport quality has to be significantly improved before Park and Ride can be implemented as an enforced measure.”

In terms of the aviation sector, Sri Lanka, in the current context, requires only one national airline.

Getting Mihin to operate domestically will add more losses and such a move should be only on the basis of commercially viable operations, it said.

The institute agreed with proposals to withdraw vehicle permits for the government sector which should be replaced with a suitable compensatory measure.

The full statement is below:

The following is an analysis of the Budget Proposals 2016 from the Chartered Institute of Logistics and Transport (CILT) on matters pertaining to the industry it represents. Even though this is unsolicited advice to the Government, it is provided on the belief that through this analysis, the final vote on the budget will be more focused to make the budget an effective instrument of reform, modernization and growth of the sector.

Road Transport
109. The correct diagnosing of the transport and traffic problem as being the continuous negligence of public transport is commended. However the budget proposals do not allocate any significant public investment towards this.

461/467. While attention has been drawn to traffic management, it fails to specify any noteworthy measures or funding. The only proposal is to spend Rs 500 million on traffic encoders which are a yet unproven technology for any form of traffic management. If vehicle owners require better traffic information and security, it is they who should pay for it and not the general public.

462.The legislative amendments to the NTC Act are welcome but the budget does not indicate what regulatory steps such as limiting access, tariff or safety are proposed in the control of three wheelers, taxis, school vans and cargo transportation vehicles. No funds have been committed to develop the required institutional capacity for effective regulation. Besides the operational regulation of these are a function devolved to the Provincial Councils and would not entirely be under the NTC.

463. Allocating funds to manufacture new buses from old bus chassis is not the best approach to modernize the fleet of buses which should be aligned more towards higher quality, low floor buses which cannot be manufactured from scrapped buses, in keeping with the increasing income of commuters.

Moreover allocating Rs 10 billion at Rs 1.5 million a bus means that 7,000 buses are to be manufactured in 2016. The annual requirement of buses in Sri Lanka is less than 3,000 and in SLTB less than 1,000 buses. Instead there should be an incentive to import modern, low floor, environmentally friendly, low emission modern buses. There could also be concessions offered for setting up ( of was deleted) local manufacturing plants for high quality buses that could be purchased by both state and private sector.

465. The proposal to encourage four wheelers instead of three wheelers is unlikely to result in better safety as small four wheelers also have poor safety records. Moreover, it has been found that 2/3rd of the three wheeler fleet is in excess of the demand. They have poor utilization. They should be used only as access vehicles for ‘last mile operations’ and improved bus and rail transport should be encouraged if overall safety is to be improved.

466. Conversion of commercial vehicles to electric maybe a good idea. However allocating Rs 150,000 per three-wheeler may not be cost effective. It is prudent to invest in such a manner after thorough feasibility study of energy conversions as done in many countries rather than to embark on ad hoc technological journeys.

In any case the allocation of Rs 50 million will allow the conversion of only 3000 three wheelers thus covering less than 1% of the fleet. Steps must be taken to actively seek measures to reduce the excessive three wheeler fleet. It is more beneficial to incur public investment to conduct an energy audit on the transport sector to qualify for low cost international financing for such upgrade of transport equipment.

468. The proposal to set up a Railway Development Council is commended. However its terms of reference should be clearly specified and intended solely for the purpose of improving the carriage of passengers and goods by railway which is the primary function of the railway. The entry of private sector for better utilizing of unused railway capacity is a progressive step. There is however no mention of the regulatory functions for such a task.

470/473/474. The on-going feasibility study for railway electrification has not been mentioned as a government priority, the proposals of the recently completed Colombo Metropolitan Regional Transport Masterplan have been completely ignored and instead several ad hoc transport projects have been included.

For example, Rs 1.5 bn is proposed based on ‘demographics’ on KV development, a project which ranks much lower in the Transport Masterplan. It is not clear on what basis this investment was decided surpassing many other critically needed investments that have been prioritized. We also fail to understand the justification of exorbitantly high investment in rehabilitation of railway lines. Nothing is mentioned about developing railway freight services, the proposed new Battaramulla railway, or the Negombo line/Airport access development.

There is also no push for extension of double tracking of main lines or any other new tracks for which studies have been done. Instead, monorail which is not even been considered as the first two priority alternatives in the Transport Masterplan have been proposed for the Negombo corridor and other corridors. Funds should be allocated for the implementation of projects under this plan and not on ad hoc projects that seems to convey they are supplier driven initiatives.

472. The comments that railway freight is to be encouraged is a statement in the correct direction. It is unfortunate that no strategy to create ICDs, or investment is allocated to make this statement meaningful.

471. It is encouraging to note that “Park and Ride” facilities attached to both railway stations and bus stations have been mentioned. This is a meaningful initiative for which Rs 1 billion has been allocated. However the strategy of charging vehicles that do not carry 4 people is a failed strategy in many parts of the world. Utilizing modern technology such as Electronic Road Pricing is essential if this is to be implemented practically. Moreover, public transport quality has to be significantly improved before Park and Ride can be implemented as an enforced measure. None of these have been mentioned.

475,476/477. Water transport has been provided special attention. It is important to note that none of the planning studies carried to date by international or local experts have identified the financial or economic viability of this mode of transport. Spending Rs 250 million on such an initiative when there are other urgent needs for recommended projects cannot be understood.

490-493. It is encouraging to note that the government intends proceeding with the Central Highway and its extension to the north and east. However it must be reiterated that the feasibility of neither of these is yet to be fully determined and made public. The current traffic levels and current speeds beyond Dambulla are unlikely to make such extensions a necessary investment in the present context.

There is a grave danger that the failure of the last government referred to in the budget as the “over-zealous attitude to improve the road network” is likely to continue. The government which is trying to develop the country with restricted finances should explain how the economic feasibility of projects such as the proposed Ruwanpura expressway has been established. Moreover there is concern that a government established on Yahapalanya principles appears to want to continue with single source contracts without competitive bidding, a feature which was severely criticized by the then opposition before the January 2015 election.

Moreover, none of the roads in the Western Province mentioned in the budget including the elevated road to Kotte, have been found to be economically feasible in the recent transport studies. Allocating nearly Rs 30 billion towards these without any allocation for the recommended projects intended to improve public transport makes the statement of the government that “the important aspect is to what level the public transportation system should be developed to ensure that any citizen of the country could utilize the facility without resorting to private transportation’ an empty promise. In all aspects it appears that most of the public money allocated to transport is to be spent on building roads and the rather small allocation in the budget on public transport is only for projects that have little benefit to the public.

494- 497. Creation of an Infrastructure Development Authority awaits explanation. Allocating Rs 1 bn for same is therefore observed with concern. However the intention of creating integrated infrastructure is welcome. The proposed North East highway should have a much broader planning scope that would not only create industrial parks but also improve the quality of life of the people. Expressways are expensive infrastructure for fast movement between two exits of a road, but contribute poorly to overall mobility improvement in a country unless accompanied by the relevant transport and regional development policies. We are unaware of any such indepth studies that have been done either for the Central or the North East Expressway which will have a combined investment of several hundred billion rupees- a fact that has not been disclosed.

557. The government appears to take a very futuristic approach to environmentally friendly vehicles. The reduction of Excise Duty for Solar and for Hydrogen and in the case of Helium which is yet to be even suggested as a fuel for vehicles, is interesting. What is worrying is the non inclusion of more established technologies such as electric and hybrid vehicles which were promoted heavily over the last few years. In reality now there is no real concession for import of vehicles using non fossil fuels. It is a pity that every budget experiments with concessions for different technologies confusing the consumer and causing immense losses to the industry. In other countries, government intervention regarding new fuel types are followed only after universities and research institutes are asked to comment on the viability and future sustainability.

559. The Vehicle Emission Testing program even though somewhat flawed, is one of the most effective steps taken to curb pollution. There is no logic for increasing the fee to Rs 5,000 and will only increase the likelihood of corruption. The testing centres are currently making profits and there is no need to increase the burden on the consumer by raising this fee. The fact that the government has been unable to effectively regulate the two present operators, raises the question how it will regulate liberalized issuance of emission certificates. If government wishes to impose an ‘environment tax’, adding a levy on fossil fuel would be more effective and equitable.

563. We agree that the vehicle permit should be withdrawn and replaced with a suitable compensatory measure. Senior public officers can and should use public transport whenever possible. In fact we suggest that withdrawing these permits even for Members of Parliament would become one reason to improve the quality of our public transport system. If indeed the government loses Rs 40 billion a year from these concessionary permits, half of that money if invested wisely over 20 years will be adequate to improve and modernize the entire public transport network across the country to a world class system.

605. While the intention of reducing road accidents is laudable, it is sad to note that the only action towards this has been to increase the fine for damaging public property which is unlikely to have any impact. No funding for serious improvement in road safety has been considered. As such the public cannot be assured any safer travel

Aviation Sector
397-409. The intention of converting Mattala Airport to a facility for logistics and cargo services is a welcome approach. However, the key components for attracting airlines or land connections to production areas of goods are not even planned. Moreover flights operating only for cargo (freighters) are questionable, as the yields in Sri Lanka are phenomenally low for a viable operation. The government may consider specific actions such as to encourage especially European, Chinese and Indian leisure carriers to enter into SL using Mattala which eventually will open belly capacity for cargo. It could consider concessions for Sea-Air hub operations targeting markets in Bangladesh, China and Africa.

It is also felt that Sri Lanka in the current context requires only one national airline. Getting Mihin to operate domestically will undoubtedly add more losses and any such move should be only on the basis of commercially viable operations. There is no explanation how the locations for new domestic airports were picked. We need to understand the rationale and benefit of these new investments when many of the existing airports need funding for expansion so that we do not continue with follies similar to Mattala.

Shipping
478-482. The Government’s aim to make Sri Lanka one of the top twenty transhipment hubs in the world by 2025 represents moving up about 10 places in the world rankings, which should be possible if the demand led expansion of the south port continues over the next decade. Since the primary infrastructure is already in place what is now required to make this happen is robust enabling legislation relating to the peripheral development of other maritime related services such as flagging, adjudication and arbitration, regional head offices for maritime players.

The proposal to issue further licenses for “deep sea bunkering” is confusing and raises doubts whether any studies have been done on the impact on the current operations.

Logistics & Freight Forwarding
483-486 It is unclear if the industry is to be liberalized or not. The first step on the road to such liberalization was announced in the speech and retracted by Monday! Implementing an ICD is imperative and private sector investment should be actively sought for this on urgent basis.

484. Introducing an annual license fee of Rs 100,000/- per vehicle for entering the port will certainly have a negative impact on transporters as well as import/export trade in the country as it will simply increase operating costs of all the stake holders for no justifiable reason.

131. This statement on how to develop supply chain linkages of agricultural products appears completely incorrect and displays a poor understanding of the working of supply chains. This should be redrafted or removed.

Conclusion
The budget is rather disappointing that it gives no clear direction to improve the sector. The budget appears to follow the trend of previous years in supplier driven ad hoc investment proposals for infrastructure which are likely to increase indirect taxes imposing inequitable bearings on who pays for the use of infrastructure.

Moreover, there are no significant regulatory changes proposed to bring about the paradigm change required in the transport & logistics sector to modernize and to be efficient to make Sri Lanka a globally competitive destination for investment and services.

The continuing preference for single source contracts, lack of transparency and adherence to feasibility studies and dubious economic benefits of many of the proposed projects appear to continue and will invariably take away investment from critical infrastructure upgrades that have been highlighted in many studies and during representations made by industry personnel in public forums and meetings over the last few months.

Rtd. Major General Lionel Aluvihare
Secretary General
Chartered Institute of Logistics and Transport