All Six Major Hubs In Asia Developed By Private and Foreign Investments
By Rajiesh Seetharam
Last month the Sri Lankan Government announced it had taken a decision that the Sri Lanka Port’s Authority (SLPA) would develop and run the East Container Terminal (ECT), thus, reversing the tripartite agreement, signed in 2019 by the previous Yahapalanya Government, with India and Japan. This week the Cabinet approved a proposal for an Indian company to develop the West Container Terminal (WCT). In this background, Ceylon FT spoke to Shippers’ Academy Colombo CEO Rohan Masakorala on the recent ECT developments and the Sri Lankan economy. Masakorala has over 30 years’ experience in the exports and Shipping industry, holding various positions in the public and private sector in Sri Lanka, and with international exposure in Singapore, Australia and USA.
Excerpts of the interview:
What is your opinion on last month’s Government decision to withdraw from tripartite agreement signed with India and Japan on the ECT?
A: It is a unilateral decision. There would have been a joint press conference if the Government had consulted the other parties. It is similar to cancellation of Colombo LRT project, which was planned to be developed with Japanese (JICA) aid. The Government should honour international agreements or negotiations without giving into to pressure from various forces. This gives a wrong signal to International investors. Trade Unions taking control of national policies on how ports should be run isn’t good for the country’s future.
“JCT and ECT should be run by the SLPA as it would give control of both Liner and Feeder Vessels,” states Former Executive Director of Ceylon Shipping Corporation. What is your view?
A: I have a different view, It’s about how all ports and terminals work with global customers. Multinational companies or international port operators, who have more global networks, will be able to attract more vessels and business compared to the SLPA, which plans to work in isolation.
The Government should be a regulator and create the business climate for the private sector and international investors to run the business. It shouldn’t be borrowing, investing in businesses like ports and taking huge risks. It should adopt a landlord model and make money using its assets. It can enter into partnership with private port operators, like what it has done with the South Asia Gateway Terminal (SAGT) and Colombo International Container Terminal (CICT). In this model, the Government, in addition to getting profit share in terminals, can also earn revenue through royalty fees, taxes on profit, and on other ancillary services such as bunkering services, harbour dues etc. This is how leading hubs like Singapore work while owning the asset. There are clear examples and models of this system that have delivered over the years
How does Singapore run its ports?
A: The Government of Singapore created an investment company called Temasek holdings, which owns two companies, namely, PSA International and PSA Singapore. PSA Singapore has partnership with foreign Shipping line operators and foreign port operators to partner with the Singapore port. PSA International invests in global ports. However, the revenue finally comes back to Temasek in Singapore. These two companies are not stopped from making investments abroad; similarly foreign companies aren’t stopped from making investments in Singapore either. The Government of Singapore doesn’t put big money into businesses but rather collects taxes. Sri Lanka offers huge tax relief to projects that bring huge returns on investments which is also wrong.
There is a criticism that foreign investors take back the profits to their country?
A: Hasn’t Singapore, Hongkong and Dubai developed with foreign investments? Are all profits in these hubs retained in their own countries? They have a GDP per capita of USD 50,000, while we are struggling with USD 3,800 GDP per capita. Foreign investments create a multiplier effect in the economy by bringing in capital, technology, new employment opportunities, market access and other benefits like tourism to the country. We have around 1,500 companies with foreign investments in BOI zones. Our Sri Lankan corporates have also invested in other countries including India, Bangladesh, Fiji, UK, USA etc.. That’s how global business works. In Singapore, the Marina Bay Sands are owned by Amercia’s Sand corporation. Singaporeans are not protesting saying that Americans are taking back profits to America! We cannot be an open economy and pick what we want and expect investments to change our landscape and economic development through short sighted protectionism.
“No foreign investments, but local Private investment for ECT is fine.” How do you view this?
A: These are outdated views and extremist theories, with no ground level basic economics thought about; some people think we can do everything (self-sufficiency theory of yesteryear communists). Is it only Singaporean private companies who are operating in Singapore? We could not get any local listed or non-listed company to develop Hambantota port despite Government calling for RFP’s several times. If this logic is extended, we might end up closing the apparel industry too. There are so many Apparel exporting companies in Sri Lanka with foreign investments. Look at the hotels in Sri Lanka. In the hospitality sector, we have global brands like Hilton, Taj, Shangri-La. Our companies have hotels in Maldives, and these companies do advertise the Maldives too, it’s about all being part of the global value and supply chains that can make an island like ours prosperous.
Why were local companies not interested in Hamabantota?
A: The reason could be that there wasn’t any business in Hambantota for them or they didn’t have the global scale. But China, being a huge global economic power, would be able to slowly develop it. China is a net creditor of the world. They can afford to make a loss for short term. They look at it as a long term asset. Moreover, it’s a strategic supply and distribution location in the Indian Ocean for the maritime interest of China under BRI.
At a recent conference, a minister, citing national security, said the SLPA should run at least one terminal. What is your view?
A: Port of Haifa in Israel was called upon to be managed by Chinese company and DP world has been bidding for Israel ports. Ports in USA are managed by Chinese companies and other private companies. USA government doesn’t manage any port. India has 13 major ports, one port is fully privatised, while 12 ports are run in partnership with the private sector. What about strategic national security in those countries? There were wrong messages being spread by certain trade unions that Indian ports are managed by the Indian Government alone. Only Jawaharlal Nehru Port (JNPT) is run by the Government, which is also seeking to privatise claiming that they are unable to compete with private companies. I guess politicians would like to have some control over certain assets for their own benefit.
In 2006, the USA blocked the sale of six major port managements from British owned P&O to DP Dubai World, citing a threat to national security?
A: This is very old news. DP world now has some terminal operations in USA. It runs a terminal in New York and two terminals on the East Coast. Sometimes politics sway over economics, people can be shown cold war time examples too. We are in an evolving world and things have changed. Now many international players are in operation in US ports, including the UAE and China. In 2018, another UAE based port operator, Gulftainer, won a 50-year exclusive right to operate and develop a port in the US State of Delaware (Port of Wilmington).
Not only in Sri Lanka, but in other countries too, there is so much protest against privatisation of State-owned assets. Why do you think this is so?
A: The bottom line is that politicians in certain parts of the world like to keep State Owned Enterprises (SOE’s) under their control to benefit themselves by giving employment to their supporters, gain commissions from contracts, issue permits and in the case of ports, awarding support services like catering, painting, cleaning and truck operating to their favorites. These support services are worth billions of rupees. Sometimes proper tenders are not called for, or details are leaked to their favorites. They create their own systems inside the institutions. But if it is in case of public private partnerships, everything is accountable and transparent. I think best way to promote their agenda is hide behind things like national security. That is the reason for almost all SOE’s to run at a loss in this country.
A geo-political analyst, whom I recently interviewed, said opening ports for Indian investments may lead to conflict of interests, as India is also trying to develop its ports to increase transshipment volumes under the Sagarmala project. What is your view?
A: We cannot expect India not to develop its own ports as its economy expands. During the COVID-19 lockdown periods, when we couldn’t offer an efficient service, shipping liners went to India. India is still way behind us in terms of efficiency in the ports and shipping industry. That is the reason for privatisation of Indian ports and the current Indian Government to initiate the Sagaramala project, which is to improve connectivity among Indian coastal regions in the eastern economic corridor. Adani group, which was supposed to get 49% in the ECT is one of top port terminal operators in India. India or Sri Lanka doesn’t have major shipping liners, so the Indian Government doesn’t decide on which port the vessels should call. It is the shipping liners from, Europe, Japan, China, etc. that would decide on which port or terminal to call. When China started developing its ports, there were few people who said the Hong Kong port would idle. But, despite the massive development of Chinese ports, Hong Kong is still one of the best ports in the world. Hong Kong grew with the growth of Chinese economy too. In the last twenty years, India’s output has grown around 400 times. We should try to utilise the growth of Indian economy to develop our ports.
Would there be a chance for India to obstruct the growth of Sri Lanka’s port sector using Adani?
A: Which terminal operator in the world would do something like that? Why would a private company like Adani not develop ECT if it had 49% shares or any other terminal? If Adani group got ECT and did not develop ECT it would be a loss to Adani too. Would Adani invest USD 700 million and see it wash away? Adani group has other shareholders too in ports. Moreover, the SLPA would have been the major controlling shareholder with 51% according to the tripartite agreement. So India can’t control growth of Sri Lankan ports through Adani and there is no need for them to. DP World of Dubai has investments in Indian ports. Did Indians say that Indian ports would idle if terminals were offered to DP World of Dubai which has a major hub in the Middle East?
I read the 1Q2020 results which state that the cargo throughput in Adani ports across India represented an 18% increase compared to the first three months of the previous 2019 financial year. Also, Adani Ports’ container business also reached an all-time high of 1.5 million TEU. Now, Adani has even surpassed DP World. That’s how you create competition and efficiency.
Do you think there should be an investment cap on foreign investment?
A: Depends on the circumstances. Malayasia keeps at least 25-30% with the Government. With regard to SAGT, my position was the Government should have had 30% share instead of 15%. Similarly, on the CICT we spent USD 400 million for the breakwater. I knew the CICT would make money from day one, thus I proposed that the SLPA should have had at least 30%. Similarly, we should have had a better shareholding than the current 15% in in the Hambantota Port Terminal. I don’t also agree with leasing out Hambantota Port for 99 years. It shouldn’t have gone more than 40 years with option to renew. So, going into private and foreign partnership is good, but with the appropriate percentage of shares for the Government to manage its costs. We also need to have a better tax policy on such investments for the benefit of public.
How do you think our International Relations get affected with the ECT issue?
A: I welcome Chinese investments in Sri Lankan ports, though I don’t agree with certain terms and conditions. I do not agree with the way we backtracked from the ECT tripartite agreement. We should deal with these things in a diplomatic way. Also, it is important to keep in mind that India is the largest contributor to our ports’ revenue by means of transshipment. We need a national policy for ports similar to the Mahaweli development project. The survey for Mahaweli project was done by an American company in 1958. After that all Sri Lankan leaders followed a uniform policy to implement that project which was accelerated by former President J.R. Jayewardenae. In today’s context such a project wouldn’t had been possible to start, politicians would have spread rumours that American companies are going to take our land. That is what happened to the Millennium Challenge Corporation (MCC). We lost USD 480 million grant from USA at a time when we were struggling to service debts.
Our people protest on the streets when India, USA, Japan or EU come in with projects, but we are less vociferous with China or Russia. One may recall the asbestos incident in the recent past. So, as a small island, we need to be friends with all nations equally, not selectively. Singapore manages good international relations with all economic powers, but we are selective in certain cases due to false perceptions built among public by politicians, which is not good.
At a recent conference Minister of Urban development Dr. Nalaka Godahewa said that Hambantota Port made USD 500 million in operating profits by the time it was leased to a Chinese company in 2017, and that there was no need to go for the lease as the port would have made the profits required to repay the loan in a short period of time. How do you view this statement? Did Hambantota Port Terminal make USD 500 million?
A: I have no Idea of such figures. The Hambantota Port operation commenced in 2010 and was leased to China Merchants Ports Holding Company in 2017. SLPA has never released the official accounts for the Hambantota Port up to now to the public domain. There are no separate accounts for separate terminals, so there is no way to compare terminal performance be it Jaya Container Terminal (JCT) or Hambantota Terminal. But we know all Governments called for RFP’s to develop Hambnatota and nothing major materialised in Hambantota as it never had a business feasibility done.
Around 60% of our transshipment business is from India. What should we do to get more business from other countries?
A: Countries in ASEAN region are more dependent on China for their ports. Similarly, we are dependent on India and the subcontinent. This is due to geographical reasons and nothing can be done on that. We must work with business realities and make Sri Lanka a business-friendly location to attract more investors and ensure a competitive environment.
Who are our major competitors?
A: There are six major transshipment hubs in the Indian Ocean region, apart from Colombo. They are Dubai, Abu Dhabi in the UAE, Salalah (Oman), Singapore, West Port and Port Klang in Malaysia. One needs to understand that we are not competing with India. India is our major customer, like China is to Singapore and Hong Kong. We need to match our services to the same level as Singapore or UAE.
Tell us about Salalah Port. What was the lost opportunity?
A: Salalah Port (Oman) was commissioned in 1998 with PPP, but Sri Lanka was not keen on those reforms in the mid-1990s. As a result, private investors built Salalah Port in Oman and part of the Indian west coast’s cargo started to move there, at the same time Malaysia too started its second port with PPP. Sri Lanka came to the PPP model only in 1999. If we had done our reforms at the proper time (1996) by now we should have been handling 10 million TEUs instead of seven, we have had very many lost opportunities due to policy failure.
Currently, we handle seven million TEUs per year. What should be done to increase this?
A: We have to increase capacity at the right time. We should have right mix of public, private and foreign investor partnership that have a global network in the shipping industry. We should simply change the SLPA Act to a Landlord model and should improve efficiency in support service like bunkering. The SLPA Chairman has said that there are 10,000 workers whereas the requirement is only 3,000. Gradually, this issues should be sorted out through different measures like voluntary retirement, and see that no new intake happens unless necessary. We need to be world class in what we do, be it in Colombo or any other part of Sri Lanka.
What is your view on giving the West Container Terminal (WCT) to India?
A: Nothing much to say. I have been very clear on my position of how ports should be run. When the Government decides to scrap the agreement to give 49% of ECT to India, and then say we are going to offer WCT to India many will have questions on its logic. However, with the perception damage already done, I think that is the only way to do damage control, also considering the fact that India is our major share of business. However, personally it’s better to always go for open bidding, with specifics, but the situation we have now on our hand is different.
In addition to being a veteran in the shipping industry, you are also an economist. What is your view on the recent Central Bank notification for exporters to convert 25% of their proceeds to rupees when proceeds have been received?
A: Exporters bring foreign exchange to the country, they should have the freedom to decide on how to manage the finances. The Government certainly can bring regulations, but those regulations need to have a proper process and understanding when being implemented. Different companies have different exposures on foreign exchange. For example, some exporters borrow foreign currencies more than 90% of LC value. Now the Government is asking to convert 25% of proceeds. In that case, to pay 90% of loan in foreign currency, now he must buy 15% from the market again as he has already converted 25% into rupee. Government should have discussed these practical issues with exporters, and then found an amicable solution rather than imposing it on them.
We need to increase our export from the current levels of USD 10 billion. Government should encourage exporters to increase exports and bring in much needed foreign exchange. So, this is a sector that needs special focus and facilitation by the Government given the country’s situation on foreign exchange. So, the consultative process is a better approach.
Recently, we had discussions on this with the CBSL and some level of understanding has been reached and a solution has been offered.
What was decided in the discussions with CBSL?
A: We met CBSL officials including the Governor and State Minister for Money & Capital Market, Ajith Nivard Cabraal. They took note of the issues faced by the exporters due to the new regulation. Later, it was unofficially informed to me that a new amendment would be made whereby once exporters receive their proceeds, they can pay their outstandings, like loans in foreign denominated currencies and only 25% of the remaining would have to be converted to rupees within a period of 30 days.
Due to its strategic location and being a natural port, Trincomalee has the potential to become an oil hub in the BIMSTEC region. Is there any issue on developing Trincomalee Port due to India and the 13th Amendment?
A: Not really. India may see it as a security threat, if another global power increases its influence in Trincomalee due to its proximity to India. Sri Lanka should work with India and other investors and start developing Trincomalee. How did Singapore develop as an oil hub? Did Singapore develop by its own money? It rather invited global oil companies from America, France, Britain petroleum, and other countries. These international companies built the oil refineries. Similarly, India also has the capacity to do it. It has massive companies like Reliance to build and operate oil refineries. We don’t have the technology. Before LIOC came in 2003, who had the oil tanks? In that case, why didn’t Ceylon Petroleum Corporation make Trincomalee an oil hub way before 2003? Oil business is about having the technology, scale, and the market. Oil business works with the international brokers. For example, China or India buys hundreds of million tons a year, whereas Sri Lanka buys few hundred thousand tons. So you can’t compete with India or China. They have the bargaining power as they buy in huge quantities.
How did Singapore become a major oil hub?
A: In 1962, we nationalised the oil industry during the Srimavo Bandaranaike premiership and pushed out the foreign companies. But later, we got Iran’s help to start a refinery in 1969. Today Ceylon Petroleum Corporation is a State-owned loss making enterprise. When we sent out the foreign companies, Singapore invited the foreign petro- chemical companies; today Singapore is the top bunker supplier in the world with an annual bunker sales volume close to the 50 million-ton mark. We also get down our oil from Singapore.
Today our politicians are saying at any given time 300 ships are passing Hambantota. They are actually mostly crude and energy ships going from Middle East to Singapore. At any given time 10,000 ships are anchored in Singapore Port. As a result, several activities like vessel maintenance, ship financing happens in Singapore. Sri Lanka only handles around 4,500 ships for a whole year. Singapore has created that business environment. In Sri Lanka, some of our people are saying that we will also become an oil hub without knowing about how the oil industry works. Sri Lankan brokers don’t purchase millions of tons of oil. Today, foreign companies in Singapore buy bulk crude oil and refine it and sell it to the world. Today, Singapore is the major oil hub in the ASEAN region. Refineries run into billions in investments. Sri Lanka is also an ideal location. But in 1962 we sent out the foreigners, if not, Trincomalee could have been a major oil hub in Asia in the 1960s and now. In that case, probably in my opinion, the separatist war could have been avoided as people could have been economically better off and it would have been very difficult to give them arms to fight. But, unfortunately pragmatism has still not come to our island in managing political economics as well as commercial economics.