Colombo Dockyard enters into strategic collaboration with Mazagon Dock Shipbuilders of India

Colombo Dockyard aerial view 

• Strengthening Sri Lanka’s maritime industry and enhancing national economic growth

Colombo Dockyard PLC (CDPLC), a public listed company and Sri Lanka’s premier shipbuilding and ship repairing facility, recently announced the signing of a landmark strategic investment agreement with Mazagon Dock Shipbuilders Ltd. (MDL), India’s premier shipyard renowned for its expertise in naval and commercial vessel construction. 

As two of the leading names in the maritime industry, MDL, known as the “Shipbuilders to the Nation,” and CDPLC, positioned as the “Frontiers of Sri Lankan Industrialisation,” continue to strengthen the industrialisation drive in Sri Lanka. 

MDL has a strong reputation as a technologically advanced and high-quality shipbuilder for both Indian and overseas markets. MDL is a public sector enterprise, traded in the National Stock Exchange and Bombay Stock Exchange and is a “Navratna” status company, a recognition awarded by the Indian Government to selected public sector undertakings (PSUs) that have demonstrated strong financial performance, operational efficiency, and has financial autonomy.

This collaboration marks a significant milestone in the growth and development of Sri Lanka’s maritime sector, offering substantial benefits to the nation and Colombo Dockyard alike.

CDPLC was established in 1974 as a State-owned enterprise. However, in alignment with Government’s policy and in response to mounting debt that hindered the company’s growth primarily resulting from significant capital investments in the construction of the 125,000 DWT drydock and the challenging macroeconomic environment at the time, the company was privatised in 1993. As part of a comprehensive restructuring process, the Government of Sri Lanka divested 51% of its shareholding in Colombo Drydocks Ltd., to Onomichi Dockyard Co., Ltd., of Japan with a condition that Onomichi shall not transfer any of its shares in Colombo Drydocks Ltd., to any party without the prior written consent of the Government of Sri Lanka during the first five years from 1993. 

The company was faced with financial insolvency because of the adverse impact of shipbuilding market conditions, the Easter Sunday attack, COVID-19 pandemic, European inflation, energy crisis in Sri Lanka, bankruptcy of the country, abnormal interest rates and inflation, amongst others. The shares of the company were transferred to the Watch List of the Colombo Stock Exchange with effect from 10 June 2024, due to emphasis of matter on going concern in the Independent Auditors Report for the year ended 31 December 2023. 

Following the termination of the Management Agreement on 25 November 2024, and the consequent decision to exit by Onomichi of its majority shareholding, the remaining members of the Board resolved to ensure the continuity of the business. 

The company initiated a search for a new investor capable of revitalising the company through purchasing the 51% of stake from Onomichi along with a capital infusion. The company reaffirms that the 51% of the sale shares are entirely privately owned and are not held by the Government or any governmental entity. Pursuant to an open and competitive selection process, and after a thorough evaluation by investment experts of the expressions of interest and proposals received from nearly 40 interested foreign parties or collaborations, the company selected MDL as the preferred strategic investor. MDL’s proposal was deemed the most compelling and aligned with the company’s strategic objectives and Sri Lanka’s maritime vision.

The company is of the view that MDL possesses the necessary financial resources, technical expertise, and a proven track record to support the company’s recovery and drive sustainable growth. On 27 June, MDL’s Board approved the investment of up to $ 52.96 million which reflects and envisages the potential consideration for all the shares subscribed to under the Rights Issue of the company, as well as the acquisition of all the existing shares of the company if all the shareholders, including Onomichi, were to accept the mandatory offer made by MDL. The acquisition will involve a combination of primary subscription and secondary acquisition of the company’s securities of its existing shareholders. The deal modality between the company and MDL was carefully designed and structured to ensure that the necessary funds for the company’s turnaround will ultimately be infused into the company by MDL. This deal also safeguards the interests of minority shareholders, leveraging MDL’s financial strength and long-term commitment to CDPLC’s growth. In the absence of such support, the going concern challenges posed a significant risk to the minority shareholders.

The collaboration with MDL is set to enhance the company’s technical capabilities, expand its portfolio, and increase its competitiveness in the regional and global shipbuilding markets. By leveraging MDL’s advanced technology and proven shipbuilding processes, the company can accelerate the modernisation of its facilities and upgrade its service offerings.

The company recognises that the collaboration with MDL will enable the company to position itself as a key player in the Indian Ocean region, benefitting from India’s growing influence in regional trade, and maritime policy and also help the company to integrate more deeply into India’s economic sphere, opening up opportunities to participate in Indian and global maritime projects and benefit from its international trade agreements.

Benefits to Sri Lanka

Boost to national economy: The collaboration will adhere, support and enhance the Sri Lankan Maritime Policy Initiatives and pave the way for future strategic growth. This strategic alliance will generate new employment opportunities while ensuring the job security of approximately 3000 present employees and stimulate economic activities within the maritime sector, contributing positively to Sri Lanka’s economy.

Technology transfer and skill development: The collaboration will facilitate knowledge transfer and specialised training programs, enhancing the skill set of the Sri Lankan workforce and fostering innovation in the maritime industry. The collaboration will enable the company to continue to promote and develop Sri Lanka’s national training requirements including providing necessary training opportunities for national universities, vocational and technical training institutes in order to develop maritime and engineering education in the country. It will enable the establishment and development of a technical training academy to train and certify local and regional youth for maritime industry requirements, which in turn will fulfil the requirement of the company and the Sri Lankan maritime industry. 

Maritime security and infrastructure: The collaboration will further strengthen the company’s capabilities to enhance Sri Lanka’s maritime security and sovereignty. The company will be in a better position to continue to serve the requirements of the Sri Lanka Navy, Sri Lanka Coast Guard, and other State institutions with regards to shipbuilding and ship repair services required by such institutions on priority basis. The company affirms that it shall not, under any circumstances, undertake or participate in any foreign defence-related shipbuilding or ship repair projects without the explicit prior approval of the Government of Sri Lanka.

Promoting export potential: This collaboration positions the company to actively engage in both Business-to-Business and Government-to-Government initiatives, unlocking opportunities to secure valuable export incentives and subsidies. It also strategically aligns the company’s operations to enhance eligibility and ease of access to shipbuilding and repair tenders from the Government of India, particularly those offered by Government-owned entities. It is evident that the collaboration will open up new avenues for the company to further penetrate Indian/international markets, increasing foreign exchange earnings through shipbuilding and ship repair contracts, and in turn to enhance the export revenue of Sri Lanka. Furthermore, the collaboration will support the company to benefit through the long-term visions and policies of the Government of India. The company plans to leverage its strategic position to ride the wave of growth of India’s long-term vision to become a global maritime leader by 2047 by expanding the shipbuilding capacity, fostering innovation, and building a robust maritime infrastructure, all of which could present the company with numerous business and growth opportunities in both shipbuilding and repairs. These initiatives will enable the company to promote its export potential and bring in much needed foreign exchange revenue into the Sri Lankan coffers.

Benefits to Colombo Dockyard PLC

The collaboration will provide the following direct benefits to the company.

Job security: The collaboration will ensure job security, employee wellbeing, and existing work benefits and governance. 

Skill development: The collaboration will support skill development initiatives for the company employees through training programs, certifications, and professional development opportunities in shipbuilding and related fields. 

Enhanced market position: The collaboration will reinforce the company’s standing as a leading shipbuilder in the region, attracting new business and strategic partnerships. MDL will support the company’s growth, including the expansion of its business, strengthening its capabilities, and increasing the company’s market share, and assist to secure access to Indian Government support and incentives and provide access to the Indian market, which will act as a platform for the development and growth of the company. The collaboration will also assist to overcome current regulatory restrictions/barriers and allow for seamless access for repair of Indian Government-owned vessels. 

Expanded project capacity: The order pipeline will be enhanced due to MDL’s network and strength. This will provide significant opportunities for growth and sustainability of the business. The alliance will enable the company to undertake more complex and high-value projects, with the support of financial backing of the MDL to issue refund guarantees necessary to execute new shipbuilding contracts and solving any working capital deficits for execution of these projects. 

The issue of refund guarantees posed a significant challenge for the company earlier. Due to the weak financial environment and the deterioration of the banking sector in Sri Lanka after the declared bankruptcy of the country, the company was unable to secure bank guarantees required for new shipbuilding contracts to facilitate the receipt of initial advance payments. Under these conditions, bank guarantees issued by Sri Lankan banks were not accepted by international clients or financial institutions. Furthermore, international banks were unwilling to provide counter-guarantees for guarantees issued by Sri Lankan banks, largely due to the country’s downgraded credit ratings. However, through the strategic alliance with MDL, the company now benefits from MDL’s financial strength and backing, enabling it to overcome these constraints and move forward with confidence.

Access to expertise, research and development and innovation: The collaboration will provide the company with access to cutting-edge shipbuilding technologies and best practices. MDL shall engage in joint research and development initiatives with the company and assist the company to stay ahead of the curve in terms of maritime technology, infrastructure, innovation, and sustainable shipbuilding practices. MDL having ventured into several Artificial Intelligence (AI) projects, the company has the potential to leverage on these R&D efforts to the company’s benefit.

Integration into Indian supply chains: With access to Indian supply chains, the company will be able to compete better on both pricing and timelines against the global competition, while retaining the existing global supply chain network of the company.

Sustainable growth: The company will be able to make joint investments to upgrade its infrastructure and improve operational efficiencies, positioning the company for long-term growth. 

Brand identity: The company and its present subsidiaries’ brand names and logos will be retained, enabling it to maintain strong relations with existing established clientele. 

The collaboration with MDL, which is supported by Indian Government policies and incentives, offers the company with exceptional growth opportunities in shipbuilding, repairs, and heavy engineering. The company would gain a competitive edge through expanded market access, regulatory advantages, and the ability to secure long-term, high-value contracts. Additionally, aligning with India’s national and international maritime goals would allow the company to scale and thrive in the rapidly evolving global maritime industry. 

This collaboration will primarily ensure the stabilisation and growth of the shipbuilding and ship repair business and ensure the job security, wellbeing, and professional and skill development of employees. Further, it will enable the company to gain the competitive advantage of the rapidly growing Indian economy while safeguarding national security concerns.

The company is excited to embark on this journey with MDL, whose experience and innovation will be invaluable. With the leading role played by the company, it will enable the company to drive Sri Lanka’s maritime development strategy with the strong backing of this new investor.

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