18 October 2018 12:00 am Views - 2695
He went on to say, “To do this, we must be open to global trade, embrace competition and take on the world and win. Whilst the government will not be a nanny state, we do not forget the vulnerable and those who need the support of the state.”
Brave words no doubt, heralding a much-needed change in overall approach.
Among the industries targeted by the minister for liberalization was the shipping sector. What would this entail?
Protectionist era
In the 60s and 70s, protection in shipping was the name of the game. Developing countries were eager to develop their national merchant fleets and their efforts were encouraged and supported by the UNCTAD’s Code of Conduct for Liner Conferences that proposed a cargo split of 40:40:20 – with the higher proportion to the respective fleets of the trading partners and the lower percentage to their flag carriers. It was a radical move.
Sri Lanka was in the forefront of this development with the establishment of the Ceylon Shipping Corporation (CSC) in 1971 and the Central Freight Bureau (CFB) in 1973. The CFB was the first organisation among the developing countries to have a mechanism in the form of a central freight booking office that had the ability to allocate cargo following the guidelines of the UNCTAD Code.
The CFB model was adopted by several developing countries with the technical assistance of the CFB officials. The CSC modernized its fleet from break bulk to containers and dominated the Sri Lankan market and also performed creditably in the India-Pakistan to Europe trade against fierce foreign competition.
However, with the winds of change ushering in open economic policies in Sri Lanka, as well as in many developing countries, protection for shipping in international trades began to lose its lustre. The Sri Lankan policymakers adapted to the change and the CFB was disbanded in the early 90s. The CSC was unable to weather the heightened level of competition (a period in which several carriers ceased to exist) and departed from liner shipping in the mid-90s.
Sri Lanka’s import and export trades were fully opened up for free competition. Any shipping line was able to call at Sri Lankan ports and shippers were free to make their choice of carrier at freight rates determined by market forces and the lines were permitted to select a local agent of their choice. Shipping was liberalized.
Ports and terminals
Not to be outdone, Sri Lanka’s ports and terminal sector also ushered in change. The Sri Lanka Ports Authority (SLPA) was formed in 1979 and controlled all port and terminal activity. In 1999, the SLPA agreed to a 30-year build-operate-transfer (BOT) concession agreement with a consortium of foreign and local investors to set up the South Asia Gateway Terminal (SAGT). This was one of the largest foreign investments in Sri Lanka and was completed in three phases in 2003. The investors in the SAGT were:
The SLPA is a minority shareholder. With this development, the ports and terminal sector was liberalized.
The SLPA went one step further signing a 35-year BOT agreement, which saw Colombo International Container Terminal (CICT) come on stream in 2013. China Merchants Port Holdings Company owns 85 percent of CICT’s shares, with the SLPA holding the balance.
In December 2017, the SLPA agreed to a 99-year lease of the Southern Port of Hambantota to China Merchants Ports Holding for US $ 1.12 billion – Sri Lanka’s largest foreign direct investment in the maritime sector.
In the first half of 2018, Colombo had the highest growth level of any global port compared to the same period in the prior year. Its transshipment volumes during this period had an impressive growth of 19.8 percent.
The downside to this feel-good story is that the Port of Colombo is almost at full capacity with no room for expansion until the East Container Terminal is operational. The country’s desire for greater foreign earnings and investment would be satisfied if this project is fast-tracked.
Nine foreign investors have expressed an interest in investing in the East Container Terminal.
The SLPA has an ambitious expansion project on the drawing boards that could attract further foreign investment.
What remains to be liberalized?
All the ballyhoo about liberalization comes down to a relatively insignificant aspect of shipping – the shareholding of local shipping agents.
The global container shipping industry has been highly unprofitable in the past few years. Earnings have been exceptionally volatile despite the volume growth. Some of the pain is self-inflicted through the penchant to gain market share by adding capacity through often unneeded new and larger vessels. This scenario has forced several carriers to merge with their larger brethren for survival. Some, such as Korean giant Hanjin, did in fact go out of business stranding thousands of laden containers throughout the world.
Carrier consolidation has led to the top six having a market share of over 70 percent:
Consequently, when blame is cast on the local shipping agents for cartelization, the reality is that carrier consolidation has forced the concentration of agencies among a few companies – a development completely out of the control of the local companies.
The Ceylon Association of Shipping Agents (CASA) has over 130 members and competition for agency business is fierce and ever present, bearing in mind that large carriers require agents with the required organisation to support their business.
The proposed liberalization would raise the current limitation of foreign ownership of local shipping agents from 40 percent shareholding up to 100 percent.
Should this proposal be implemented, it would kill the local agency business that has been the cornerstone of maritime development in the country for the past 50 years. It is an industry that Sri Lanka should be proud of and could continue to be a catalyst for enhancing Colombo’s status as a maritime hub.
The following results detrimental to the national interest are likely to occur, should the agency business be liberalized:
It is clear that the negatives far outweigh any positives in allowing foreign control of agencies.
All the major carriers are already present in Sri Lanka. Liberalization would not bring in any newcomers.
Furthermore, local agents have no authority to fix freight rates. Pricing is the exclusive preserve of the principals. Hence, liberalization will not intensify competition or lower freight rates. The converse maybe true as local agents do currently espouse the cause of shippers with their principals for favourable treatment based on the merits of the case.
Foreign influence
It is clear that the European Union (EU) is funding the lobbying efforts for agency liberalization as four of the six major carriers are European companies. It is important to recognize that protection in shipping is alive and well in several EU countries in the area of Cabotage, which is very detrimental to connectivity and efficiency in container shipping. So is the case with the United States, China and several other developed market economies.
Hence, the Finance Ministry may wish to rethink the subject before killing the goose that lays the golden egg!
(Dr. Anil J. Vitarana is Principal, Cranford Consulting Inc., former President of United Arab Shipping Company (North America) and General Manager of the Central Freight Bureau of Sri Lanka and Ceylon Shipping Corporation)