Prerequisites for enhancing Sri Lanka’s status as a shipping hub

Apr 05, 2010 (LBO) – Sri Lanka is to become a “Naval, Aviation, Commercial, Energy and Knowledge hub.” What are the conditions for maintaining and enhancing Colombo’s position as a shipping hub for the southern Indian subcontinental region?

This is perhaps the easiest of the five. We have to thank the late Minister Lalith Athulathmudali for providing the leadership for creating the preconditions. By giving leadership to the modernization of the Colombo Port before India started reforming its notoriously inefficient ports, he helped Sri Lanka seize its geographical advantage.
Colombo hub

In 2007, the Colombo Port handled over three million TEUs of containers, of which 77 percent was transshipment cargo from India. Container volumes have doubled over the past decade, as a result of increased transshipment business from India.

It was praiseworthy that volumes were doubled, keeping pace with the world average. But, Colombo is actually the major hub port for the Southern Indian region, in addition to Mumbai’s Nhava Sheva. For a region experiencing 10-13 percent growth (India’s overall growth rates were lower, but the South and the West have higher growth rates), 11.5 percent CAGR in container traffic growth is quite inadequate. Colombo appears to have lost some market share despite increasing volumes.

Colombo’s volumes must be seen in context. It handles around 1/8th of the TEUs handled by the leading Asian and world) container port, Singapore.

 

 

 

 

 

 

 

 

 

 

 

Major delays in the construction of the Colombo South Port and getting the necessary legislation through Parliament, despite the drafts being ready, has made Colombo more vulnerable to competition from fast-improving Indian ports such as Cochin in the southern sub continental region, in addition to the above named hub ports that are picking up increasing shares of Indian traffic. Salalah in Oman is also emerging as a major threat to Colombo’s position.

Two hubs or one?

The Mahinda Chinthana Idiri Dekma envisions 10,000 ships coming into the new Hambantota port a year, in addition to arrivals increasing in Colombo (including the new South Colombo Port). Given all the existing ports combined have never welcomed more than 5000 ships a year, this is a rather extravagant expectation.

Hubs cannot be decreed into existence. Hubs emerge because the economics are right. They disappear when the economics go wrong. The Colombo Port became a regional hub because it had a comparative advantage over the Indian container ports and had a geographical advantage. These advantages cannot be transferred to Hambantota by Presidential decree.

It is reported that Hambantota is “initially” intended to be for bulk cargo (http://www.lankabusinessonline.com/prerequisites-for-making-sri-lanka-an-energy-hub/). This is cargo that is transported unpackaged in large quantities. The cargo can be in liquid form or a mass of relatively small solids (e.g., grain) that can be poured into a ship’s hold. This is very good, except for the word “initially.”

But unless the volumes build up quickly to generate the revenues needed to pay back the not-very-soft USD 360 million Chinese loan utilized to build Hambantota, temptation will arise to shift container traffic to Hambantota.

For the cargo that are not transshipped, i.e., originate in or terminate in Sri Lanka, Hambantota is unattractive, at least until the rail and road links to the rest of the country get fully built out. So theoretically, one could imagine a shift of transshipment traffic to Hambantota with the rest remaining in Colombo, at least in the short term of 5-10 years. But this theoretical outcome is unlikely for two reasons.

The first is that it is not that simple to separate out transshipment containers from those intended for Sri Lanka. Therefore, there will be a bias toward the established port, which is Colombo. The second factor which will amplify the first is that port services companies will be reluctant to open new offices in Hambantota because it is an extra cost and because they cannot be sure whether the new business can justify the costs.

So unless the government wields the carrot (tax breaks or subsidies for those who open in Hambantota) or the stick, Hambantota is likely to attract low volumes of container business at the outset. Either option is silly. Sri Lanka does not benefit by shifting business from Colombo to Hambantota. The national economy benefits only if Hambantota generates new business.

This is why, in an earlier column (http://www.lankabusinessonline.com/prerequisites-for-making-sri-lanka-an-energy-hub/), I proposed the construction of a massive oil refinery combined with a bunkering operation in Hambantota. This would bring ships serving the refinery and also attract ships for refueling, building on the proximity to the sea lanes.

Another possibility, explored in detail a few years ago by Shantha Jayasinghe in an MBA thesis at the University of Moratuwa, involves developing Hambantota as the principal terminal for liquefied natural gas (LNG), one of the least polluting sources of carbon-based energy. This, of course, is a green field exercise, with all the advantages and disadvantages that come with starting on a blank sheet.

Unless Hambantota specializes as an energy hub/refueling stop, there is a danger that Colombo could lose its present hub status. If any attempt is made to shift traffic to Hambantota the end result may be no hub in Sri Lanka.

Required policy changes

A hub port makes money from the services it provides those who transship cargo through it. The importers and exporters in the country where the hub port is located benefit because the hub attracts many large (and therefore economical) ships and offers a much richer schedule to a range of destinations. If Colombo loses hub status to, say, Cochin, our exporters will have to send their cargo to Cochin in small ships and have it transshipped at the new hub. This will, in most cases, increase costs. In all cases, time to destination will increase.

Ports appear on the surface to be monopolies. But the reality is more complex. Modern container ports comprise multiple terminals. Colombo has two, one operated by the government, and the other by SAGT [South Asia Gateway Terminal; interesting term). There is competition among terminals in terms of price and quality (primarily turnaround time for the ship).

This benefits both the shippers who use the port for direct shipments and the transshippers: that is, unless the government has been silly enough to allow the two terminals to collude or, even worse, has officially required one terminal operator to set the other’s prices. The latter was the case when Sri Lanka allowed inter-terminal competition in 1999: the Ports Authority operated one terminal and set the prices of the private competitor.

Inter-terminal competition is the best that a country’s exporters and importers can get. But those who use hub ports for transshipment can benefit from inter-port competition too. Indian shippers need not send their cargo through Colombo. They can use Port Kelang or Tanjung Pelapas in Malaysia, or the world’s biggest and most efficient container port in Singapore, or even those in Oman or Dubai.

So unless the terminals in Colombo continue to improve their productivity and offer more services for the same or less money, Colombo could very well lose its current position as the major hub port for the southern Indian subcontinental region.

Given the international competition that is involved, light-handed regulation is what is required, focusing on avoiding blatant collusion between the terminals within the port/country. The Public Utility Commission of Sri Lanka, a multi-sector regulatory agency established in 2002-03 under the leadership of Milinda Moragoda has the necessary independence and the competition powers to do the job.

What remains is for the government to move to a landlord port model, divesting its ownership of the Jaya Container Terminal and allowing competition between the multiple terminals (the present two plus the new terminals in the Colombo South Harbor). Government cannot perform the multiple functions of landlord, operator and regulator, as it does now.

The Ports Authority should focus on being a good landlord. Private operators should be allowed to invest in and manage their terminals while paying the contracted rents for the use of the land and the harbor. The Public Utilities Commission should effectively regulate the port, giving primacy to competitive forces.

The Mahinda Chintana II says little on how the vision of making Sri Lanka a shipping hub is to be achieved. Getting Colombo right is way more important than the Hambantota bulk cargo and refueling port. The way to get Colombo right is to privatize the Jaya Terminal (applying the earnings to reduce the USD 360 million Chinese loan) and make Colombo a well regulated landlord port. The larger and more urgent task is to understand the importance of the Comprehensive Economic Partnership Agreement (CEPA) with India that is critical to locking in Colombo’s position as a key hub for the southern Indian subcontinental region.

All these principles (on public-private partnerships, reforming regulatory regimes, understanding the vital importance of India to our economy and entering into the CEPA forthwith) are set out in the Sri Lanka National Congress’s “Agenda for Influencing the Government.”

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