Why Govt. should have honoured the MOC on the ECT

Monday, 8 February 2021 00:00 -     - {{hitsCtrl.values.hits}}

It is a poor reflection on our country and in particular those who govern it. For most, it will appear as if the Government caved in to the demands of the trade unions and various other interested parties. Naturally, questions will be posed as to whether Government-to-Government agreements can be rescinded due to mob pressure 

By Sanjeewa Jayaweera

The announcement that the Sri Lanka Port Authority (SLPA) will be the sole owner and operator of the East Container Terminal at the Colombo Port has been greeted by many as a tremendous victory for the country. 

Leading up to the announcement, we were inundated by news reports as to why we should not be selling a national asset to a foreign party and that the country’s sovereignty and even security was at stake. 

This is despite 80% of ports worldwide been developed and operated as joint ventures involving foreign investors. Two of the existing terminals at the Colombo port are operated with the involvement of foreign investors, and as shown later in this article, they contribute handsomely to the overall profitability of SLPA.

The unionised employees attached to the Jaya Terminal (JCT) were at the forefront of the agitation, egged on by the Janatha Vimukthi Peramuna (JVP), a few Cabinet Ministers and Buddhist monks and some sections of the media. The trade unions used their favourite tactic of threatening industrial action if the Government did not give a written undertaking that the ECT would be 100% owned and operated by the SLPA.

In the middle of all this, the Indian High Commission in Colombo released a press statement stating that the Government of India expected an expeditious implementation of the trilateral Memorandum of Cooperation (MOC) signed in May 2019 and that the commitment of the Government of Sri Lanka (GOSL) with regard to the ECT has been conveyed several times in the recent past, including at leadership level. 

They drew attention to the fact that the Sri Lanka Cabinet also decided three months ago to implement the project with foreign investors. By any reckoning, it was a pretty forthright statement.

By stating that a commitment has been made at leadership level, they confirmed that our President and Prime Minister had assured them that the project will go ahead. It is not unheard of for governments to go back on undertakings given. However, in this instance, it seems that the GOSL has gone back on repeated assurances and as recently as a few days, weeks and months ago. 

It is a poor reflection on our country and in particular those who govern it. For most, it will appear as if the Government caved in to the demands of the trade unions and various other interested parties. Naturally, questions will be posed as to whether Government-to-Government agreements can be rescinded due to mob pressure.

Obtaining FDIs

The Government is keen to attract Foreign Direct Investments (FDI) to Sri Lanka, and there is no doubt that the country’s development needs lots of it. Even hardline Communist countries like China and Vietnam have actively sought and obtained FDI. They have created the necessary environment for foreigners to invest in their countries. 

Unfortunately, in Sri Lanka, as is the case in most other issues, we only pay lip service to attract FDI. Corruption, bureaucratic inefficiency, lethargy, archaic labour laws and misplaced nationalistic idealism try their best to dissuade those who wish to invest their capital in our country. That is why we have stagnated for over 70 years. There is no doubt that the actions of both the Yahapalanaya and the current Government have seriously impacted our country’s image regarding FDI.

The misinformation perpetuated by those opposing the trilateral MOC was disingenuous. The project proposal was to grant a lease of 35 years to the parties who would invest and operate the ECT. It was to be on a Built Operate Transfer (BOT) model. 

The land was never going to be sold, as stated by some. This was totally incorrect. In most countries, a lease of 99 years, as granted for the Hambantota Port, is understood to be freehold and can be deemed a sale. However, to repeatedly state on various forums that the country is selling its national assets was dishonest.

It was envisaged that SLPA would own 51% of the project. It is fair to assume that the Adani group would have sought the participation of a local company who owned a minimum of 15% of the project. This would have meant that the SLPA and the Sri Lankan company together would have owned 66% of the project. So, I am at a loss to understand as to how people could say that Sri Lanka was selling a national asset.

Cost of development

The development of the ECT would require an investment of around $ 650 million. This is equivalent to Rs. 130 billion. The SLPA had already spent approximately $ 80 million, developing a 400 m finger berth and some backup yard space. The question is, who is going to fund the balance of $ 570 million (Rs. 114 billion)? 

Certainly, SLPA on its own, does not have the financial capacity. I presume it will be the Government. According to the Annual Report (AR) of the SLPA for the year ended 31 December 2018 (FY 2018), there is an existing debt due to the Government of Rs. 60 billion. 

Obviously, the SLPA can borrow part of the money as debt in all probability under a GOSL guarantee. Some amount of this debt would need to be dollars. They would certainly need to pay a premium interest rate given the negative credit rating of the country. 

In FY 2018 the SLPA provided Rs. 11.3 billion as an expense to the income statement as foreign exchange losses. This reflects the exposure to existing foreign currency debt. One can only imagine what it would be in the future with further depreciation of the rupee and additional dollar debt.

It is evident to any sensible person that in the context of the current economic and financial crises that our country is facing, the Government does not need any additional financial commitments. This is especially so when capital is readily available from local and foreign entities. The Government needs to invest in education, health, and many other vital areas. In my view, this itself is a good enough reason to allow foreign investors who would have brought much needed foreign currency to the country.

Secondly, in addition to capital, foreign investors would bring superior technology and best practices along with a good marketing plan that would attract the bigger shipping lines. Additionally, management would be in the hands of professionals with proven skills and capabilities in the maritime industry. 

A recent discussion highlighted the complete transformation of Sri Lanka Telecom (SLT) once it was privatised and a Japanese investor took over the management. I should know, because in 1993 when I built a house and applied for a telephone connection, I was told that the waiting period was two years! Given that transshipment volumes account for about 80% of the Colombo Port’s business, most of which is to India, an Indian investor’s presence would undoubtedly enhance and ensure the ECT’s success.

Thirdly we know that the JCT terminal operated by the SLPA is inefficient and the profit generated is not commensurate to the revenue. According to the Annual Report (AR) for FY 2018 of SLPA, Rs. 8 billion was received for the year from the two privately managed terminals as Lease rentals, Royalties and Dividend Income. 

This is income from just being the ‘Landlord’ and a 15% investor in these two terminals. I understand that various other revenue streams are generated and received from the two terminals. So it seems that just being a ‘Landlord’ and a minority shareholder is far more profitable for the SLPA, Government and obviously for the citizens of this country than SLPA undertaking the entire investment and operation of the ECT terminal. According to the AR 2018, the Return on Capital of SLPA is only 2%.

SLPA Chairman General Daya Ratnayake, in a television talk show, said that there are 10,000 employees at the JCT terminal when the actual requirement is only 3,000! In my opinion, this too is excessive. The two privately owned terminals handle more than twice the volumes handled by SLPA at the JCT terminal with a staff cadre less than 3,000. A reflection of efficiency and productivity! 

It is a fact that many politicians of both parties have used the SLPA as a convenient source of employment for their supporters. Their wages and various other perks will make most public servants, and even those in the private sector cry in frustration. Even 40 years ago, I remembered stories of how some port workers would get a friend to sign their attendance while they were doing another job or sleeping at home!

According to AR 2018, the overall salaries, wages, allowances and other related staff costs at the Colombo Port is around Rs. 20 billion paid to 8,948 employees. An average cost of Rs. 2.2 million per employee. The Rs. 20 billion includes an overtime cost of Rs. 3.6 billion despite being significantly overstaffed! I presume a reflection of poor work norms? No wonder the unions were agitating.

Unfortunately, this is how State enterprises work and the reason for their sorry state. Only a handful of State enterprises make money. The losses posted by the Ceylon Electricity Board, Ceylon Petroleum Corporation, Sri Lankan Airlines and the National Water Board are staggering. The fact of the matter is that ordinary citizens are funding these losses through both direct and indirect taxes. 

It is generally acknowledged that governments must not involve themselves in running businesses because of their lack of entrepreneurial skills. Into that equation when you add rampant corruption and nepotism, we have an ideal recipe for failure!

Fourthly, whether we like it or not, keeping India happy is essential. It is the regional power under whose umbrella we take refuge. Long gone are the days when Mrs. Sirima Bandaranaike masterfully navigated our foreign policy to remain non-aligned. 

To her eternal credit, she kept both India and Pakistan as our friends during and after the 1971 Indo Pakistan war. Since 1977 we have had a plethora of Foreign Ministers, to whom the subject of foreign affairs was double Dutch. We need to exclude from that list the late Mr Lakshman Kadirgamar, a skilled and highly competent Foreign Minister.

No doubt, the world has become much more complicated since Mrs. Bandaranaike’s time. After the collapse of the Soviet Union, we have seen China’s inexorable rise as an economic superpower. They now want to be recognised as such with a status similar to the USA. In this scenario, many countries are forced to align themselves to either the US and its allies or China. 

President George W. Bush in September 2001 stated: “Every nation, in every region, now has a decision to make. Either you are with us, or you are with the terrorists.” I must hasten to say that he was not referring to China; however, the message is quite clear.

In the last 50 years, India has played a decisive role in our country’s affairs, and it is our misfortunate that India and China are not the best of friends. However, geopolitical reality is that we need to be friends with India just as much with China which is at odds with what President Bush said! 

The actions of the Government in abrogating the MOC might adversely impact our relations with India. This is when the country’s economy is in dire straits, fighting a raging pandemic and facing a barrage of issues at the forthcoming UNHRC meeting. Not the best of times to antagonise big brother!

It was announced that the Cabinet has approved for the ‘West Terminal’ at the Colombo Port to be developed as a joint venture with the Indian and Japanese governments and their nominees. One must assume that many who agitated against the ECT would again take to the streets and protest. 

Will India and Japan be once bitten twice shy? In case both the ECT and the West terminals are developed parallel, will there be sufficient business volume for both the terminals to make money or will ECT become a white elephant?

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