Too many negatives for Lankan economy if shipping agency sector is further liberalised

It is prudent to uphold the current maximum foreign ownership policy of 40% to ensure that the national interest is safeguarded against encroachment and domination by foreign shipping companies

By Lalith Edirisinghe

At the recently-concluded Economic Summit, weobserved some debates that took place suggesting liberalisation of the current 40% foreign ownership threshold in shipping agency/freight forwarding business in Sri Lanka. However, there are different views in the shipping community as it could have an alarming impact on the industry and the country at large considering the industry background that the present share of domestic and foreign ownership has been established.

Shipping, which was a highly-protected industry in Sri Lanka, was fully liberalised in the year 1990. This enabled any shipping line to freely operate in Sri Lanka, exposing the industry for the first time to operate in anopen market environment. 

Port terminal operations were liberalised in 1996. It was thereafter that private sector participation took place where companies such as Evergreen and Maersk Lines invested in SAGT, Tokyo Cement and Prima were permitted to operate their own terminals.The Colombo Dockyard’s majority stake was given to a foreign private company.Shipping agency business was liberalised in 1993, where foreign participation was limited to 40%.

There were many instances in the past, where a very few shipping lines exerted pressure to remove the 40% foreign ownership threshold in shipping agency business in Sri Lanka. However,strong committees appointed by Government’s namely, ‘Report of the Committee of All Regulations’ made under the licensing of Shipping Agents Act No. 10 of 1972 dated March 1991, headed by Justice D.G.Jayalath, Retired Judge of the Court of Appeal and Legal Advisor, Ministry of Defenceand ‘Report of the Presidential Committee on Maritime Matters’ dated February 2009 headed by P.A.Ratnayake, P.C. having researched the industryhad come up with strong justifications why further liberalisation of shipping agency business should not be recommended. Some of the reasons are mentioned below:

nThere is no benefit to the country in terms of Foreign Direct Investment – asthe minimum investment required for setting up of a shipping agency business is Rs. 1 m.

nIt does not increaseemployment opportunities– as the human capital required to run a shipping agency business whether it is a foreign owned or locally owned, is the same, but usually foreign companies employ less numbers compared to the local companies.

nThere is limited opportunity for any kind of knowledge transfer – Currently agency activities are all well managed using local personnel. With the extensive training and development made by local agencies, expertise of these Sri Lankan personnel is highly sought after by foreign principals for their overseas offices.

nThere is limited opportunity for any kind of technology transfer – All latest state-of-the-art systems of principals are currently deployed. These systems are integrated with locally developed systems customised to support local operations. 

nThe foreign owners will operate the agency businessas their cost centres, creating a loss in foreign exchange earnings – foreignowners will repatriate all funds that are now retained locally to their countries, depriving our country not only in terms of foreign exchange but also preventing wealth creation amongst local companies. By making these agencies cost centres, the country will also be deprived of tax collections.

Through the years, major shipping agency companies in Sri Lankansuch as John Keells Group of Companies, Hayleys Group of Companies, Aitken Spence Group of Companies, Hemas Group of Companies, McLarens Group of Companies, Asha Group of Companies, Setmil Group of Companies and Ceyline Group of Companies, etc.,have been re-investing the funds generatedthrough shipping agency businessinto expanding the local transportation and logistics industry, by way of developing container depots/freight stations, state-of-the-art warehouses,maritime training academies and in bunker ships, tugs and barges, supply boats, heavy machinery, trucks and trailers, etc. These investments have not only helped the growth and expansion of the country’slogistics sector but also has helped create a strong employment base across the country. The businessof shipping agency and related businesses generates foreign exchange well over $500 m per annum.

Moreover, most of the local shipping companies have gone beyond the logistics sector and invested these funds in developing other industries such as tourism, manufacturing, power generation, provision of off-shore services, management of plantations and healthcare, which has immeasurably helped the growth and expansion of the local economy whilst fuellingthe growth of these local companies.

This situation is highly beneficial to the country that should be encouraged further. We should be concerned that if the present liberalisation policy is influenced and the foreign owners get controlling interest not only will these agencies be restricted in their growth but will also limit their capacity to invest in either related or unrelated business as hitherto done by local entrepreneurial shipping agencies over the past decades.

There is conclusive evidence that nothing has prevented the willing shipping companies from investing as and when required, for example the investment that has been made by Evergreen and Maersk Line in the SAGT Terminal, the interest that was expressed in the case of the South Terminal developmentand the interest currently being expressed by shipping lines in the East Terminal development. These cases amply justifythat the current 40% foreign ownership threshold in shipping agency businessis in no way a deterrent to any shipping line making large investment, if they see it to be of strategic importance and the country has a sound investment environment. Also such investments are connected to shipping agency businesses.

Moreover, if you further analyse what is happening today, shipping lines like Evergreen and Maersk which having made investments in SAGT, notwithstanding the current foreign investments criteria, use the services of CICT and JCT which also goes to prove that shipping lines decisions to increase volumes is not entirely dependent on an investment they have made on a particular venturebut the strategic advantage they would gain by doing so.

Given the facts stated above and the recommendations made by several eminent personalities, it isprudent to uphold the current maximum foreign ownership policy of 40% to ensure that the national interest is safeguarded against encroachment and domination by foreign shipping companies. The circumstances are indeed similar in the case of freight forwarding, given the limited scope of work involved locally. Here again removal of the current foreign investment threshold is in no means going to accrue any benefit to the countryin terms of investment, employment opportunities and technology or knowledge transfers. This would simply deprive the country of revenue collection and prevent wealth creation amongst local companies impacting the economy. 

However, in the case of logistics, any international logistics provider interested in developing the industry by way of value creation and expansion through investment in infrastructure that would benefit the industry and the country at large, has absolutely no restriction in setting up a 100% foreign-owned company to carry out logistic activities under Part 4 of the Finance Act No. 12 of 2012 as amended by Finance Act No. 12 of 2013 ( this regulation maybe cited as Finance Act Commercial Hub regulation No. 1 of 2013).

Since the country’s intention of the liberalisation of the shipping industry is based on the premise of creating Colombo as a logistics hub, there are urgent initiatives that should be addressed, such asthe integration of the various authorities (border management agencies in particular) involved in the supply chain through the creation of a single window platform, enabling full electronic transactions in the import/export processes, aligning the mindset of the authorities to perform as a logistics hub and ensuring that our sea and airports provide world class services from an international hub perspective.

Shipping is a derived demand of international trade, thus any adverse impact on the local shipping community will have its reverse bullwhip effect on many other local industries such as manufacturing, freight forwarding and clearing, container yards, and trucking companies, etc. Losing control of the local agent will by no meansbenefit the local industry stakeholders because the local agent always standfor the national interest. Under these circumstances, if any change in policy is contemplated,it is more fruitful to initiate a wide discussion with the representatives of the industry including all stakeholders before such a drastic and far-reaching decision is arrived at.

From the country perspective, it would therefore be appropriate to conduct a proper research and ascertain potential eventualities in a more scientific manner as it would facilitate the policymakers to arrive at more industry friendly decision.

[The writer, MBA(J’pura),PgDip.BM(Colombo), EDM(Colombo), CMILT, is Head of the Department 

of Logistics and Transport.]