Debate over Sri Lanka’s China-owned container terminal

Aug 13, 2013 (LBO) – I had a civilized debate on Facebook with a good friend on whether Chinese ownership of the new container terminal at the just inaugurated Colombo South Harbor.

He had, in a newspaper interview, called the new port China’s Colombo South Harbor, not our harbor. This spells out my response.

Private ownership

It is common nowadays for terminals to be given out on long leases or otherwise to specialized operators. Singapore, one of the leading container ports in the world (second largest in container volume), has leased out several container terminals to Cosco (China) and Maersk (Denmark). The container terminals compete among each other as well as with terminals in other ports. Efficiency improves, goods move faster, and the economy of the country home to the harbor benefits.

One of the great achievements of the Kumaratunge government was the introduction of private sector management to the Port of Colombo in the form of the South Asia Gateway Terminal (SAGT), operated by a unit of John Keells Holdings. It was not perfect.
The private terminal was not allowed to compete on price with the government-operated Jaya and Unity Terminals since the Sri Lanka Port Authority functioned both as regulator and operator.

Yet, it had a beneficial effect in improving the overall performance of the Port of Colombo, including the Jaya and the Unity Terminals. And given the SLPA was part owner of SAGT, parts of its profits flowed into SLPA, allowing an inefficient organization to appear less of a spendthrift than it is.

The planning for the Colombo South Port preceded the present government. SAGT had a right of refusal on one of the terminals. The plan was to concession out the other terminals. Despite the change in government, that plan held. The terminal was concessioned out. SAGT declined. India was offered the terminal, but declined because it lacked a suitable operator. A Chinese company, connected in a convoluted way to Cosco, won the bid in partnership with the Aitken Spence Conglomerate.

Others, such as the Port of Singapore Authority (PSA) and Dubai Ports World (DP World) could have bid, but did not. I, for one, think that was a good thing. These ports compete with the Port of Colombo for Indian container transshipment business. It is better to have an operator who can be a true competitor. DP World is operating several Indian ports, seeking to improve their efficiency (clue as to why an Indian company was not a good choice to operate a terminal in Colombo).

So it seemsthat there can be little dispute about permitting foreign entities to operate container terminals in harbors owned by a Port Authority. There was really no reason for my friend, a fully credentialed PhD Economist, to object to a practice common across the world, including India, Singapore and the US (though Islamophobes there nixed DP World’s bid to operate terminals in six major US ports).

No local private ownership

His concern appeared to be about the fact the terminal operator was majority Chinese owned. When it appeared that greater investments were required than originally envisaged, Aitken Spence withdrew saying it could not raise the additional resources. The result was that the Chinese partner increased its holding to 85 percent, with the remainder being held by the non-investing SLPA.

The active local partner did not have the privileges of SLPA. It had to make investments proportionate to its share-holding. It was replaced by the majority partner who could.
Will the terminal be less efficient because China Merchant Holdings owns 85 percent of the shares? No. There is no economic basis for placing limits on foreign ownership. Sri Lanka has no limits on foreign ownership of telecom operators; India has. By most measures, Sri Lanka’s telecom sector performs better. Knowledgeable people in India are working hard to lift the illogical foreign ownership limits that are starving these infrastructure industries of essential capital resources.

So the problem is something else.

Chinese investment

So the issue appears to the nationality of the foreign investor. I did not hear such objections to NTT, a company from Japan, when it bought 35 percent of Sri Lanka Telecom and the right to manage it. Nor did I hear such objections when a UAE company bought Tigo and renamed it Etisalat.

So what is objectionable about China?

China is the biggest “donor” to Sri Lanka, I am told. But then, when NTT bought a share of Sri Lanka Telecom, Japan was the biggest “donor.”

India will not like China operating a terminal in what I call India’s second largest container port, I am told. People who make these speculative claims have not look at India-China trade. In selling iron ore, cotton and other commodities to China, nationality does not appear to matter. Normal commercial considerations do.

When purchasing a service like transshipment services there is no reason for commercial considerations not to apply. But for the moment, let us assume it does (may be Keells and Aitken Spence know something we do not). What are the consequences?

In the Colombo South harbor, China is present as investor. If the new terminal fails to get business, the financial consequences will be borne by the investor, not by the tax payer. In contrast, Hambantota is a fully Sri Lanka owned port that has taken high-interest Chinese loans. It has failed to attract ships. The tax payer is the loser here, not the Chinese bank that lent the money. Which is better for Sri Lanka?

Investment better than loans

So my friend need not worry. He should not only not worry, but go one step further. He should support Deputy Finance Minister Amunugama’s proposal to convert Chinese loans into equity holdings across the board. That way, they share the risks; we the tax payers are shielded from paying for badly managed government enterprises. Otherwise people might say that a PhD in Sociology is superior to a PhD in Economics, in terms of command of economic principles.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the ‘Choices’ category.