Fair winds for Sri Lanka maritime hub

• Sri Lanka Ports, Trade and Logistics Conference kicks off

By Cheranka Mendis

Sri Lanka’s potential as a major maritime and shipping hub in the South Asian region was showcased yesterday at the launch of the two-day Sri Lanka Ports, Trade and Logistics Conference and Exhibition held at the Hilton, Colombo.

While times are challenging for major economies, Sri Lanka has shown confidence in the future forming excellent relationship with giants in the emerging economic world, shaking hands with China, India and the Middle East while the geographical location adds positively to its ‘hub’ goal supporting the ambitious command of becoming a transhipment hub, fully-fledged and integrated maritime centre and maritime service support centre to the world.

The new ports

In order to achieve the vision of President Mahinda Rajapaksa, measures are now underway to develop five seaports around the island. Among the five, the conclusion of the Colombo Port Expansion Project is expected to mark Colombo as the container hub of South Asia, where expansions are currently underway to increase capacity to 13 million TEUs with the addition of three new terminals. The nearby area is to be developed as a Port City at a cost of US$ 900 million, Sri Lanka Ports Authority (SLPA) Chairman Dr. Priyath Bandu Wickrama said.

While Colombo Port is being developed, the Mahinda Rajapaksa Port in Hambantota is expected to provide world class infrastructure for manufacturing in sophisticated facilities as well as providing space for cargo freights.

Being developed as a naval and logistic hub in South Asia, the port currently functions as a service and logistic hub with free port facilities and sea port with excellent rail and connectivity to form a one-stop-shop for investors and port uses. Under Phase II of the project, seven more berths are currently under construction. 

Galle Port is to be developed as a tourist destination and recreational port with passenger terminals and other facilities such as immigration, customs, and shopping centres being built, while the world famous natural harbour in Trincomalee will be developed as an industrial port with a special economic zone being constructed in close proximity. KKS Port in the Northern Province is to be developed for the use of the north and east community for connectivity and livelihood.

“All these port development projects will make ample investment opportunities to both global and foreign investors to invest in Sri Lanka and earn desirable returns.”

He noted that the SLPA had invested over US$ 3 billion in port development projects while the private sector had committed to invest approximately US$ 3 billion in port city development projects, Colombo South Terminal Project, Hambantota Free Zone and Trincomalee Industrial Zone.

Government expectation is to obtain an additional US$ 1 billion worth of investments under the second RFP of Hambantota Port. Wickrama announced that advertisements for the RFP had already been sent out and that it would close by end August.

Government support

Transport Minister Kumara Welgama, attributing the loss of achieving the said goal on an earlier date to terrorist activities that prevailed in the country, noted that the Government was confident of hitting the targets on time.

Assuring State sector cooperation in promoting investment in the maritime sector, Welgama said: “The Government has established necessary amendments to legislation and has created systems conducive to rapid decision making and approval procedures and looked at investment promotion aspects, which include tax concessions. We are aggressively promoting investment in this area to achieve the nationalistic goals which will boost the economy of the country.”

Connecting major hubs

Speaking on the importance of emerging maritime hubs in the Indian Ocean, ClassNK Japan Chairman Noboru Ueda further acknowledged that the developing ports in Sri Lanka would do well to increase the connectivity between the East and West.

Supported by their respective governments, both Singapore and the Middle East have become strong maritime hubs, with the Middle East being noted as a hub for main container and cargo vessels.

While the two countries have secured a role as leaders in the industry in South Asia, Sri Lanka could easily join the ranks connecting these two leaders via the now developing ports. Location itself, however, is not enough, Ueda emphasised.

“Nonetheless the country is already showing signs of success in the future. Sri Lanka is making the right investments and is looking at right partnerships and investors.” Noting that this would not be an overnight transformation, he said: “The country has placed itself in a place for great success in the future. Sri Lanka will be the new Indian Ocean centre.”

Easy business

Adding to the positivity, BOI Executive Director Research and Policy Advocacy Dr. Nihal Samarappuli outlined the conducive environment created for investors. Currently 100% foreign ownership is permitted in all sectors of the economy except in a few areas that are open for locals and joint ventures only. Strong intellectual laws are also in place to safeguard technical knowledge.

“The country has investment protection agreements signed with over 26 countries to protect business under bilateral agreements and gas also entered into 38 bilateral double taxation treaties, by which income earned in Sri Lanka will not be taxed again in your own country.”

Quoting latest statistics, Samarappuli pointed that the country holds the 89th position in the Doing Business Ranking out of 185 countries, on which cross border trading is ranked at 53. “On our export and import capabilities, Sri Lanka has been benchmarked as number one in the world.”

Among a host of other measures that have been put in place to support the cause, the amendment to the Finance Act No. 12 of 2012 provides an opportunity to set up five different types of business with a minimum investment requirement of US$ 3 million.

Strategic Development Projects Act enacted in 2008 also supports investment further, where projects can be negotiated on a case-by-case basis with up to 25 years of tax holidays or partial exemptions.

Importance of PPP

Sharing the local agency perspective, Strategic Enterprise Management Agency CEO and Chairman Dr. Willie Gamage outlined the importance of private and public sector collaboration in taking forward the country’s development.

Noting that leading financial institutions such as the ADB, multilateral lending agencies and commercial banks active in the sector would prefer funding three types of port management models – State-owned and operated ‘service port,’ ‘landlord port’ and ‘private service port’ where private sector and State coexist side by side – he said the last two are preferred for obvious reason as according to World Bank, Sri Lanka operates under all three with the latter two being key.

“The Sri Lankan Government has realised the importance of having a sovereign rating done by reputed agencies for the sake of obtaining debt financing for infrastructure development. For the other two, which are the most conducive, funding is opened from a variety of lending agencies according to risk profile of the project while equity capital from international pension fund and dedicated investment funds could be tapped to the debt side structured according to the best lending terms offered by the banks.”

Being one of the early countries in South Asia to tap both equity and debt financing, Sri Lanka was among the first to introduce private sector bunkering operations within the port, terminal operations and even Customs and wharf documentation processing and management to the private sector.

Claiming that the country currently has no shortage of funds to develop the sector with the new South Harbour in Colombo and the Hambantota Port which have been built with bilateral financing and constriction engineering support from the Government of China, Gamage called on the Indian private sector to take advantage of Sri Lanka’s geographical position to become a part of the lucrative port services operations of the country.

“We would be delighted to see if a Chinese and Indian company involved in logistics management and shipping could do a joint venture here,” he said.

“I believe that it should become the collective goal of not just regional governments but also the private sector to maximise efficient and secure movements of goods while outlining strategies for investment and improvement, addressing technological security innovations and environmental initiatives interfacing with Government interests.”

He warned that due to imbalances in trade and the gaps in investment capacity and manufacturing technology, a level of domestic industry and trade protectionism measures will have to be in place in the region. Already the trend lines in the liberalisation regime are heading South and many items in the restricted list will become levy free items of exports and duty free items of imports.

“We envision an integrated, efficient and secure network and our inland roads specialising in the transportation of containerised cargo so that every box that has North America as a destination leaves our port with security stamps of assurance that all vulnerable risks have been pre-screened.”

The country must consciously address the need to expand value proposition on all fronts through the collective work of the public and private sector to ensure sustainability and continuity, he said.

Potential for transhipment

ICF GHK Executive Director Dr. Jonathan Bead also acknowledged that the country has potential for transhipment. “Don’t hold your breath,” he said, “serious transhipment will take some time.”

Claiming that the country is strategically placed for transhipment, he stated that if Colombo can develop critical mass and lock in before anyone gets in, the country will be able to hold a strong position.

“Can I continue to develop transhipment? It’s a question of tariffs vs. top-ups. This will be the challenge for the next five to 10 years,” Bead said. “To play the game you must invest and have the necessary infrastructure. Remember, you are only as strong as your weakest link.”

Mercator International UK Partner Bill Burns also commented on transhipment. “A large part of port availability is location, location, location. Unlike import export, cargo transhipment is more sustainable. Problem of transhipment is business comes in chunks unlike import export. This could be a problem, particularly when you’re planning expansions.”

Financial matters

HSBC Securities and Capital Markets India Director of Project and Export Finances Manav Futani shedding light on accessing international debt for infrastructure development in Sri Lanka observed that domestic banks and finance institutions are very critical but for the most part lend for five to seven years, “even though infrastructure and its useful life is longer than that.”

Cost of local borrowing is also high, which will not augur well for the country with countries such as Singapore and Dubai having a very low local borrowing rate.

“Global banks in Sri Lanka have little experience in project finance; i.e. lending on the basis of future prospects of big projects as opposed to lending on importance of business/company, which is what most banks do currently.”

The majority of international financing to the country has come in the form of overseas development assistance, particularly from China and India. There is also limited commercial financing in the market, he noted, while most financing comes with Government guarantees.

“On to concerns and limitations in the country, there are confines in export credit financing. It should also be remembered that not all project development is easy to finance. There are large amount of government to government loans and which is not often on commercial terms, on which when benchmarking could trap the traders.” External debt to GDP issue also puts boundaries in this regard.

Moving forward to build an international project financing appetite, local banks must look at forming access to low cost and long term funding while developing and understanding project financing – rules and learning in this regard worldwide can be applied here to form a better model. A domestically develop skill set must also be formed in this regard.

Futnani said: “The country could work with Indian banks and financial institutions to develop knowledge on the subject and can even look at potentially hiring experts or working together with them. Risk allocation and documentation procedure consistent with international law structure should also be formed.”

Pix by Upul Abayasekara