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Advocata welcomes liberalising of shipping agencies

November 19, 2017, 8:24 pm

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Sri Lanka will not become a logistics hub without significant participation of global players such as Maersk Line. The recent 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 massive: trade value is 3.5X (times) its GDP.

Transshipments make up 85% of Singapore’s port’s volumes. Sri Lanka has 750 local shipping, freight forwarding and clearing agents but 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 local companies to emulate international standards The Colombo port starts with several advantages. Amongst them are well situated on 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% 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 neighbor. 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 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 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 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 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 (eg Sri Lanka Ports Authority monopoly on destuffing 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, labeling, 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 firms 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.

More information can be found on www.advocata.org



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