There have been extensive discussions in various forums and in the media recently for and against the budget proposals made by President Mahinda Rajapaksa in respect of the shipping economy and more particularly on the terminal handling charges (THC) issue.
We, the leading exporters, who are members of the Joint Apparel Association Forum (JAAF), being active partners contributing 7 percent of the gross domestic product (GDP) and 40 percent of the manufacturing exports in the Sri Lankan economy and being a party to the litigations at the Supreme Court, the decision of which has been misquoted, decided to respond by way of this statement to clarify issues and to ensure that justice will prevail with the introduction of the proposed legislation.
Terminal handling charges
In international trade, the carriage of goods is the responsibility entrusted to the shipping liners/operators by the user of such service, who could either be the buyer or seller. Then, such service providers undertake to pick up and deliver relevant goods from one point to another.
Depending on the customary manner in which the concerned ports operate, the containerized cargo is generally delivered from a container yard (CY) to a container yard (CY) or a container freight station (CFS) to a container freight station (CFS).
In the case of freight collect shipments, it is an arrangement between the buyer and service provider and in the case of pre-paid freight shipments - it is an arrangement between the seller and service provider, who contracts for a full freight.
Therefore, picking up, loading on to a ship, transporting and unloading it at the relevant destination port and making it ready to be picked up by the importer at the given point of delivery, are the responsibilities entrusted to the shipping lines/service providers. It is for this purpose the shipping line enters into a contract with the party who is paying freight.
As far as container handling operations are concerned, when shipping lines accept freight from a CY to a CY or a CFS to a CFS, all activities, including the loading of the container at the port of loading on to the carrier and brought to the port of discharge, on to the quay apron at such port and moving it to the marshalling yard, demounted and stacked in the terminal, are included.
When the carriage is taken delivery from one point to another, it is nothing but the responsibility of the carriers to ensure delivery to that point and no one else can do it because the delivery to the destination is a condition agreed and not a mere place of convenience. An all-inclusive freight is charged to cover these responsibilities. In fact, all costs to the port payable by the ship and operator have to be borne by the party paying the freight. All are fully aware that the container is termed as extended ship gear.
In terms of the prevailing practices internationally, the liners are required to pay in advance those charges to the relevant ports authority.
However, since 1997, in Sri Lanka, shipping lines introduced a charge called freight surcharge, which was immediately changed as terminal handing charge, due to reasons known to them and they have termed them as land-based costs. The claim made by the service providers that the THC is a land-based cost, which is paid in full to the ports authority, is not tenable.
In terms of the Sri Lanka Ports Authority (SLPA) tariff guidelines published in 2011 Section III – Stevedoring and harbour tonnage – items 16-20 are payable by the ship or operator. There is no necessity to involve the shipping lines to pay such charges if the costs are to be borne by the local shipper.
Separating THC from freight
If that is the case, these charges could also directly be paid by the local party in this country to the Ports Authority as they are already paying tariff identified as payable by them without going to the service provider. The very fact that shipping lines collecting that money and paying to the ports authority proves the fact that those are charges payable by the ship/operator and not by the local exporter/importer.
This is another rationale for including these charges as part of the freight because the contractual obligation is between the carrier and the party who undertakes to pay the freight and not any other party.
It has been argued that the separation of the THC from the freight is an international practice except in a few rare exceptions. We are fully aware that in developed countries, when the THC is imposed, it is paid by the party who is paying the freight.
A good example is that in the USA, the delivery duty charge, a payment made to the ports authority, which is the equivalent for the so-called THC, is included in the freight. We believe the service providers are fully aware that even the trucking charges are included in freight in the USA.
Further, even in trans-shipment ports such as Singapore, where more than 90 percent of activities are trans-shipments, the THC is included as part of the freight when cargo is trans-shipped. Bangladesh by circular instruction suspended the imposition of the THC in 2007.
Bangladesh experienced a massive growth in export and the ships continued to sail there. Therefore, even in the so-called rare exceptions, the principle of including the THC as part of the freight is accepted. All what we are saying is that the same principle should apply in the origin ports as well.
Further, in terms of the Sri Lanka Exchange Control guidelines, shipping agents are authorized only to remit back freight so collected, adjusted for Currency Adjustment Factor (CAF) and Bunkering Adjustment Factor (BAF) and no other charges so collected can be repatriated. Therefore, in the case of inward CIF cargo, no charges can be collected and repatriated.
There have been arguments put in place that the Supreme Court in its own wisdom has given a verdict through a mediation committee that the THC is transparent, verifiable and accountable. We, on behalf of the Joint Apparel Association Forum, who were a party to this case, categorically deny such verdict was given by the Supreme Court.
In fact, the relevant parties objected to hearing of our fundamental rights case but the Supreme Court in its wisdom granted leave to proceed because the entire export community was appealing before the Chief Justice.
The Supreme Court, having recognized the lack of regulatory capacity, directed to mediate and take a decision through a consultative process. Further, the Supreme Court directed that the aggrieved party not accepting such a decision could go back to the Supreme Court for redress.
All concerned are fully aware how the said case respondent appointed the committee and the manner in which the so-called agreement was made. The party who was appointed by the second respondent to look after the interests of the exporters had taken a unilateral decision due to reasons known to him, which was not supported by the very organisation that he was expected to represent.
Therefore, it is our position that there has been no sanity extended to the THC by the Supreme Court. It is pertinent to mention that exporters having recognized the lack of regulatory framework is the reason for such behaviour, continued to make its submission both to the International Chamber of Commerce and to the Government of Sri Lanka without going back to the Supreme Court as there was no law to be interpreted.
We are pleased to note that the International Chamber of Commerce introduced INCOTERMS 2010 recognizing that the use of the FOB term is not appropriate in the case of containerized cargo where goods are handed over to the terminal. This ruling was not in the international guidelines earlier.
We, in association with the Shippers’ Council, moved for this change in San Francisco, London and Montreal by personally representing our case at the Global Shipper’ Forum meeting held. Finally, with their consent, we submitted our case to the International Chamber of Commerce drafting committee in Paris, which introduced the new INCOTERMS 2010. Having gone thus far, our prayer to our government was to bring in local legislation to bridge the gap.
It had been argued that if the proposal made by our president is accepted, the liners could increase the freight to include the THC and other charges and if they are successful, the international trading partners of Sri Lanka are liable to pay more to trade with Sri Lankans. This is the crux of the issue.
Liners are not required to worry about it. All what they got to do is quote an all-inclusive freight for a CY to CY or to a CFS to CFS and recover it from the party who pays the freight and such action will be market friendly as the liners/operators will be compelled to compete on actual cost to be incurred and not by unilaterally passing part of the cost to the weaker party, who does not have equal bargaining power or contractual obligation.
The buyer and seller will adjust their prices on the basis of the market and actual cost. It is further necessary to highlight the fact that manufacturers who are importing goods for processing value addition and export are liable to pay charges both at the point of import and export, which is how the 42 charges are hampering Sri Lankan export competitiveness.
Further, there is no consultative process in imposing these charges and they have been imposed at the will of the service provider on a unilateral basis.
Merchant Shipping Authority Act
In our understanding and based on our suggestion, we have not requested the government to interfere in prices or charges but to recognize the fact that such charges are part of the freight and as such there will be no negative impact on the income of the Ports Authority or the liners.
We emphasize that the budget proposal is for what we have requested and not to interfere in the market by way of price controls but to provide regulatory measures, bring transparency and accountability to establish fair trade practices and to avoid uncompetitive behaviour of stronger parties.
The government being very conscious of the importance of the shipping economy, while introducing regulations for proper market behaviour has extended a huge concession, which was very much similar or a better facility extended to the banking sector in the previous budget and reduced the income tax from 28 percent to 12 percent, i.e., a reduction of 58 percent of the previous tax rate. This is why we state that it is a balanced and visionary approach, making shipping revenue on par with that of export revenue.
Establishment of a properly structured Merchant Shipping Authority to meet the current and future demands of international multimodal transport trade is a proposal that is well timed taking into consideration the advancement of the shipping industry and the maritime hub aspirations of Sri Lanka.
In fact, this is one of the most important steps towards harnessing the full potential of the maritime hub activities. We note with appreciation that while all successive governments failed to see this reality, it was only President Mahinda Rajapaksa who had the courage, wisdom and capacity to bridge the gap in the legislation and bringing market-friendly practices into this trade.
What is now required would be for the liners/service providers to be in line with international practices for the purpose of harnessing the full potential of the new legislation that are being promulgated, including that of the proposed Merchant Shipping Authority Act, the hub regulation and new inland revenue concession granted to the shipping economy, which in fact would boost the shipping agents, service providers economic activity in the country.