Upping stake in Colombo South terminal: A hara-kiri by SLPA?

The decision by Sri Lanka Ports Authority (SLPA) to increase its stake to 21% from 15% in the Colombo South Container Terminal (CSCT) has raised fresh questions from within the organization and outside of viability.

Last week, the SLPA approved the sale of Aitken Spence Plc’s 30% stake in CSCT to consortium’s majority owner China Merchants Holdings (International) Co. Ltd., (CMHI), a development exclusively reported by the Daily FT in its 11 January issue’s front page.

SLPA approval is conditional as per the agreement signed between the consortium partners.

Whilst approving, the SLPA has expressed its keenness to increase its stake to the maximum of 21% provisions for which is contained in the agreement.

This purchase will be at a negotiated price but likely to be in stages depending on the cash availability.

It couldn’t be confirmed whether SLPA when buying additional stake will have to pay the same price which CMHI will pay Aitken Spence.

Apart from the price SLPA will have to pay, internally the very move of wanting to increase the stake has raised some heat due to multiple reasons.

Given its own modernization and expansion efforts, SLPA has considerably increased its debt and the decision to up the stake would mean additional cost. Analysts said financial difficulties within SLPA could be one reason why the state-owned entity had wanted to buy the higher stake in stages.

SLPA has to allocate extra funds for its exposure on the project since costs have ballooned at present in comparison to the bid stage two and half years ago. Originally the CSCT was to be built at a cost of near $ 500 million which will be financed 70% via debt and 30% from equity. However the estimated cost is now over $ 600 million, which means a higher exposure for equity contributors. The planned 6% additional stake for SLPA will be on the ballooned cost figure.

CSCT will add 2.4 million Twenty-foot Equivalent Units (TEUs) over two stages with first being completed by mid-2014.

Internal sources and financial analysts said that when the original CMHI-Aitken-Spence bid was approved the project was to make its first dollar profit in seven years but with the cost overrun (largely on account of higher construction expenses) the year of profitability has been put off for the 15th year.

At the time of submitting and awarding the bid the Colombo Port’s East Terminal wasn’t in the equation but with the latter likely to come on stream sooner than later, the commercial dynamics of CST will change as well. The SLPA is doing the East Terminal at its own cost in addition to managing the biggest facility Jaya Container Terminal (JCT).

In this context SLPA wanting to increase financial exposure raises the issue whether it makes business sense for the state owned entity is the poser circulating internally.

Another point is that by increasing the stake from 15% to 21% would only enable SLPA to consolidate the accounts of Colombo International Container Terminals Ltd (CICT), the operating company of CSCT and not account for its reserves. For this SLPA needs to pass the 25% stake threshold which is unlikely to happen, according to company analysts. Having greater minority hold makes better sense for the balance sheet and bottom line of SLPA than a 21% stake.

However the dilemma for SLPA is shoring up enough funds to honour its first equity commitment of 15% as well as contributing to the enhanced exposure on higher cost of the project. On original bid basis consortium partners’ equity financing in stages was $ 150 million of which SLPA’s share was $ 22.5 million or Rs. 2.6 billion. At estimated new cost of $ 600 million, SLPA’s exposure at 15% stake is $ 27 million or around Rs. 3 billion. Exposure at 21% stake for SLPA on the enhanced cost will be a staggering $ 38 million or over Rs. 4 billion.

Following the exit of Aitken Spence shipping industry analysts have begun to raise issues of the validity of the original bid which was accepted by the Government on the basis of private sector stake in the operating company.

Whilst Spence’s sellout would mean there is no element of public-private partnership in the CSCT project, analysts are going back to Asian Development Bank (ADB) conditions for financing the US$ 350 million funding for breakwater.

However others opined that any agreement by a consortium would have had exit clauses and Spence’s sell out wouldn’t change the structure of the bid.

Legal sources said that exit by any of the three parties are after five years and would require SLPA approval. The latter has been received whilst the issue is whether the SLPA has consulted the Attorney General’s Department about its own decision to increase the stake from 15% to 21%.

These legal sources recalled that Supreme Court re-vested the Sri Lanka Insurance Corporation (SLIC) back to the State since one party in the consortium selected for the privatization of insurance giant had left later on.

The exit of Spence and CMHI increasing its stake to 79% (if SLPA goes up to 21%) or 85% would also mean greater Chinese control in the CSCT, a development which has increasingly disturbed Sri Lanka’s giant friendly neighbor India. Furthermore China Harbour is the constructor of the CSCT.

India is the source for Colombo’s majority of transshipment volume which accounts for over 70% of the business in South Asia’s hub port. An extreme development of Indian containers shunning Colombo would also impact the sole private sector managed operator South Asia Gateway Terminals (SAGT), in which SLPA also has a stake.

However India on its part of late has been aggressively developing or modernizing its own ports and luring main lines though Colombo remains an attractive hub for major carriers so far.

The CSCT has also faced hiccups with lender China Development Bank (CDB) not willing to extend additional funding to meet the cost overruns saying the latter must be met by equity contribution as well as wanting international arbitration for dispute resolution instead of Sri Lanka as the venue.