Last week’s budget contained important proposals around the liberalisation of the shipping sector.
The port played a significant role in the development of maritime hubs such as Singapore, helping the country become a first world economy in a generation. With the right reforms, Sri Lanka’s ports could do the same.
Singapore’s domestic market is small but its trade volumes are massive: trade value is 3.5X(times) its gross domestic product (GDP). Transshipments make up 85 percent of Singapore’s port’s volumes. Sri Lanka has 750 local shipping, freight forwarding and clearing agents but the Singapore open market has over 5,000.
The availability of frequent and reliable connections via sea and air (thanks to liberalisation) encourages companies across the logistics chain to operate from Singapore. High-frequency connections sometimes allow goods to reach their destination faster via Singapore than they would through direct shipments.
A foreigner-friendly regulatory environment has attracted investors to Singapore. Around 20 of the world’s top 25 logistics companies have based their global or regional operations in Singapore. The presence of these big firms drives the local companies to emulate international standards.
The Colombo port starts with several advantages. Amongst them are being well situated on the international and regional trade routes and a deep enough draught to accommodate post-Panamex ships.
With a limited internal market, Sri Lanka, like Singapore, cannot depend on traffic from its hinterland to develop its port. It must depend on transshipment traffic. Colombo already handles a significant amount of transshipment – 75 percent of volume – but mostly to India. The expansion of Indian ports poses a threat to this business but to truly become a hub, Colombo needs to look beyond our largest neighbour.
Transshipment is a service that does not add any value to cargo. To grow this service, lower business costs and productivity are critical. Fast turnaround times and competitive rates are needed but Sri Lanka’s restrictive ownership rules and fixed fee structures result in higher costs.
Unlike other major ports where cargo handling rates are determined by market conditions, Sri Lanka’s are set by the Central Bank, which decides on agency and transshipment tariffs to local agents. The current fee structure is complicated, encourages malpractice, is determined arbitrarily and adversely affects the port and logistics industry competitiveness.
To shipping lines working with very thin margins, this fixed-fee structure represents a significant additional cost. This limits transshipment volumes to the essential – those that flow naturally due to location. Shipping lines have little incentive to route cargo from further afield.
The budget proposes to lift restrictions on foreign ownership of shipping agencies and the creation of a port regulator. This is the first step towards attracting the interest of large global shipping lines.
Sri Lanka will not become a logistics hub without the significant participation of global players. Substantial investments and presence of global firms active on ground is essential toward making the hub ambitions a reality.
With the right reforms in place, Sri Lanka could look to attract Maersk or another leading shipper to establish its South Asia hub in Colombo. That would go well beyond its limited activity with its present joint venture (JV) arrangement with a local agent. Sri Lanka can use this anchor investment to attract other leading shippers to do the same, thereby creating critical mass. This would result in a larger industry, more jobs and more opportunities for the industry as a whole.
This would make Sri Lanka a fertile ground for the top freight forwarders. It might persuade DHL or others to look at Sri Lanka as a regional hub and large e-commerce companies, such as Amazon, to use Colombo for warehousing.
Therefore, liberalization is needed. To develop the logistics sector should be open to foreign participation and restrictions (e.g. the Sri Lanka Ports Authority monopoly on de-stuffing local loose cargo), regulations on terminal handling charges, etc. should be removed. Foreigners should be permitted to invest in freight forwarding and the minimum investment thresholds and export revenue requirements imposed to be eligible to invest in declared free ports should be eliminated.
Warehousing space available within the port is limited and outdated. To support the growth of the logistics business, private investment should be permitted within the port, to build and operate new, upgraded warehouses. Alternatively, there should be zoning of a warehousing district outside the port but in close proximity to it (like Singapore).
Other investments include creating logistic networks between producer and consumer areas, markets and transport nodes that connect to the Colombo port, industrial zones and inland container depots (ICD) that speed port access and support a modern logistics corridor.
The presence of global third party logistics firms in Sri Lanka will enhance the confidence of multinational manufacturers, who will be more willing to use Colombo as a destination for value-added logistics functions (e.g. packaging, labelling, quality checking, simple assembly), etc.
These firms will bring new technology, new knowledge about logistics and supply chain management and are experienced in managing highly sophisticated and complex supply chains for their clients. It is in the trust the global firms have in their logistics companies that make them outsource key logistics and supply chain functions and their presence will be a huge value add to the location advantage of Sri Lanka.
These firms will also help market Sri Lanka as a destination for logistics, which is needed to get business. This is far easier for such firms with their global presence and networks, than for local businesses.
This would form the core of a maritime-cum-logistics hub as these anchor investments create an ecosystem of supporting services -- financial, legal and other professional services. A maritime-cum-logistics hub would be a boon to competitive local companies with relevant service-support skills and allow some of the bigger competitive companies to go global.
The Colombo International Financial Centre, a financial hub between Dubai and Singapore, is underway within the Port City. Along with the proposed national logistics policy for shipping and air transportation and the telecommunication connectivity policy, it will establish Sri Lanka as the hub of the Indian Ocean.
Production and service standards would improve massively from their present woeful state, with more transparency and less corruption.
This aligns with the Port City, linking up the port and airport, a hub around the airport as part of bigger, Vision 2025 plans and would be the beginning of Sri Lanka’s insertion into global value chains beyond garments. The big prizes are in services, not manufacturing, especially with the “servicification” of global value chain.
The lower cargo handling costs and greater efficiency will create spillover benefits to local exporters, who in turn will increase their competitiveness, further driving volumes.
Opening up the agency business does not necessarily mean the end of the local agents; Singapore has over 5000 agents and sub agents working for ship owners/operators in numerous support businesses.
The shipping and logistics business is continuously evolving and new competition is emerging. An Asian Development Bank (ADB) working paper opined that “Slow implementation of the Colombo outer harbour development plan has already caused significant damage to Colombo as a transshipment hub. This damage may be repaired but it is unlikely. Further threats to its current role exist, not least the further development of ports in India.”
Sri Lanka has been lucky for a long time because we still retain our advantage in terms of serving the Indian sub-continent cargo but it is naive to imagine that this will last. Sri Lanka is operating far below its potential, especially in terms of logistics. Therefore, it is important to remove all constraints that prevent us from reaching our potential.
The budget proposals are a good start but full reform package of port, shipping and warehousing services is needed. This presents much greater opportunities for the existing players in the long term and they should seize the challenge. Unless reforms take place, we may well find ourselves stagnating while traffic moves to competitors.
(The Advocata Institute is an independent policy think tank based in Colombo. Advocata conducts research, provides commentary and holds events to promote sound policy ideas compatible with a free society in Sri Lanka. More information can be found on www.advocata.org)