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Mon, 11 December 2017 22:14:45
Debate over Sri Lanka's China-owned container terminal
13 Aug, 2013 06:29:55
By Rohan Samarajiva
Aug 13, 2013 (LBO) - I had a civilized debate on Facebook with a good friend on whether Chinese ownership of the new container terminal at the just inaugurated Colombo South Harbor.
He had, in a newspaper interview, called the new port China’s Colombo South Harbor, not our harbor. This spells out my response.

Private ownership

It is common nowadays for terminals to be given out on long leases or otherwise to specialized operators. Singapore, one of the leading container ports in the world (second largest in container volume), has leased out several container terminals to Cosco (China) and Maersk (Denmark). The container terminals compete among each other as well as with terminals in other ports. Efficiency improves, goods move faster, and the economy of the country home to the harbor benefits.

One of the great achievements of the Kumaratunge government was the introduction of private sector management to the Port of Colombo in the form of the South Asia Gateway Terminal (SAGT), operated by a unit of John Keells Holdings. It was not perfect. The private terminal was not allowed to compete on price with the government-operated Jaya and Unity Terminals since the Sri Lanka Port Authority functioned both as regulator and operator.

Yet, it had a beneficial effect in improving the overall performance of the Port of Colombo, including the Jaya and the Unity Terminals. And given the SLPA was part owner of SAGT, parts of its profits flowed into SLPA, allowing an inefficient organization to appear less of a spendthrift than it is.

The planning for the Colombo South Port preceded the present government. SAGT had a right of refusal on one of the terminals. The plan was to concession out the other terminals. Despite the change in government, that plan held. The terminal was concessioned out. SAGT declined. India was offered the terminal, but declined because it lacked a suitable operator. A Chinese company, connected in a convoluted way to Cosco, won the bid in partnership with the Aitken Spence Conglomerate.

Others, such as the Port of Singapore Authority (PSA) and Dubai Ports World (DP World) could have bid, but did not. I, for one, think that was a good thing. These ports compete with the Port of Colombo for Indian container transshipment business. It is better to have an operator who can be a true competitor. DP World is operating several Indian ports, seeking to improve their efficiency (clue as to why an Indian company was not a good choice to operate a terminal in Colombo).

So it seemsthat there can be little dispute about permitting foreign entities to operate container terminals in harbors owned by a Port Authority. There was really no reason for my friend, a fully credentialed PhD Economist, to object to a practice common across the world, including India, Singapore and the US (though Islamophobes there nixed DP World’s bid to operate terminals in six major US ports).

No local private ownership

His concern appeared to be about the fact the terminal operator was majority Chinese owned. When it appeared that greater investments were required than originally envisaged, Aitken Spence withdrew saying it could not raise the additional resources. The result was that the Chinese partner increased its holding to 85 percent, with the remainder being held by the non-investing SLPA.

The active local partner did not have the privileges of SLPA. It had to make investments proportionate to its share-holding. It was replaced by the majority partner who could. Will the terminal be less efficient because China Merchant Holdings owns 85 percent of the shares? No. There is no economic basis for placing limits on foreign ownership. Sri Lanka has no limits on foreign ownership of telecom operators; India has. By most measures, Sri Lanka’s telecom sector performs better. Knowledgeable people in India are working hard to lift the illogical foreign ownership limits that are starving these infrastructure industries of essential capital resources.

So the problem is something else.

Chinese investment

So the issue appears to the nationality of the foreign investor. I did not hear such objections to NTT, a company from Japan, when it bought 35 percent of Sri Lanka Telecom and the right to manage it. Nor did I hear such objections when a UAE company bought Tigo and renamed it Etisalat.

So what is objectionable about China?

China is the biggest “donor” to Sri Lanka, I am told. But then, when NTT bought a share of Sri Lanka Telecom, Japan was the biggest “donor.”

India will not like China operating a terminal in what I call India’s second largest container port, I am told. People who make these speculative claims have not look at India-China trade. In selling iron ore, cotton and other commodities to China, nationality does not appear to matter. Normal commercial considerations do.

When purchasing a service like transshipment services there is no reason for commercial considerations not to apply. But for the moment, let us assume it does (may be Keells and Aitken Spence know something we do not). What are the consequences?

In the Colombo South harbor, China is present as investor. If the new terminal fails to get business, the financial consequences will be borne by the investor, not by the tax payer. In contrast, Hambantota is a fully Sri Lanka owned port that has taken high-interest Chinese loans. It has failed to attract ships. The tax payer is the loser here, not the Chinese bank that lent the money. Which is better for Sri Lanka?

Investment better than loans

So my friend need not worry. He should not only not worry, but go one step further. He should support Deputy Finance Minister Amunugama’s proposal to convert Chinese loans into equity holdings across the board. That way, they share the risks; we the tax payers are shielded from paying for badly managed government enterprises. Otherwise people might say that a PhD in Sociology is superior to a PhD in Economics, in terms of command of economic principles.

Rohan Samarajiva heads LirneAsia, a regional think tank. He was also a former telecoms regulator in Sri Lanka. To read previous columns go to LBOs main navigation panel and click on the 'Choices' category.

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READER COMMENT(S)
14. Nandana Aug 15
Simple Logic, Chinese have extra cash due to rapid development. So they can Invest. At the moment we dont have cash. To have cash we also need to improve our economic activity and ultimately savings. Thus we need to get other investors to increase activity. No harm only good.

But sometimes foreign investment in sensitive areas needed to be restricted. Otherwise it is a matter of letting others to run the risk of capital and if they reap benefits we also get shared. Nice Logic. Some people live like and die like Frogs.

13. Niro Aug 15
Good insights Rohan.
Economics is more of an art than a science. Therefore, opinions differ ...

Can you invite your friend (economist) to share his/her views on your analysis?(preferably on LBO )

12. Dayan Aug 14
Seems Roham Samarajeewa's conclusion is very constructive, methodical and suitable way to today's SL environment. Also I remember earlier occassion, same writer mentioned about CBK's government successful joint venture on Sri Lankan Air lines, during 1998-2008 period tax payer didn't have to pay a penny whereas tax payers have already paid Rs 58 billion since pulled out from Emirates.
11. Manesh Aug 13
Well said Rohan...
10. shan Aug 13
Its not about Chinese operating port its about Chinese are operating Sri lankas major economic places,in commercial city chinese holding large some of land bank,controlling stake harbour,....Its getting looks like state of Alaska in south Asia
9. Maya Aug 13
I think it’s now time to change the perception of Chinese and their investment. My question is ‘’Why Chinese Are Not White’’. We like or not Chinese are more powerful than any other nations in the world and they have money to invest and change the economy.

Can anybody show me a country which supports other country without a hidden agenda? Chinese investments are not only in Asia & Africa, they do even in Europe & America, I think this is ‘’Win Win’’ system, if we managed properly. I think we are fortune to get like this investments from Chinese, but many countries are not.

Most of us concern about how Sri Lanka is going to benefit from this terminal, my question is, how are we going to benefit more than what we earn from Colombo harbour without South Container terminal? Definitely No and all the transhipments will be diverted to Dubai, Singapore and India. As Mr Rohan mentioned we will be benefiting from other benefits from this great development.

We all know our Hambantota harbour failed to attract many ships but is this end or just start? We are positive with many investments in Hambantota. Infrastructures are already in place to accommodate those future developments. Sri Lanka’s apparel industry might get a big boost as China is exploring possibilities of opening its huge domestic market to Sri Lanka, last year China imported $ 4 billion worth of garment but Sri Lanka supplied only $ 15 million. Further China is planning to shift their orders to Sri Lanka due to the rising labour cost in that country.

I think we are still short of 15% garment employees and government is considering allowing garment operators to bring Bangladesh, Nepal & Burmese people to fill those vacancies, in case if China set up garments in Hambantota and bring labour from other countries, don’t we get enough air traffic also in MRIA? Last week one of the leading duty free chains Dufry signed the MOU with MRIA, why they do this?

Let’s be optimistic and develop Sri Lanka at least like Bangkok by 2020.

8. A citizen Aug 13
The MOST interesting lesson I learnt from this piece is though you are friends you have a different viewpoints. This culture need to inculcate here in Sri Lanka. Sometimes we believe that just because we are "friends" you should think the same way I think. Another way, I will support your argument while you support to my argument.

Sometimes we tend to believe that you are junior to me and you are not allowed to challenge me! These are the classic way of think that is having with some top academics in this country. They never used to put arguments and establish a position on an issue. This is one of the reasons why things are not evolving in the country.

Our state agencies do not have Meetings! They ask officers to come for a “meeting” and announced certain decisions which have already taken. Why should we hire professionals to work in this kind of environment? They just blind followers. I think this is stemming from schools, when head master come and announced certain decisions student never challenged. They just follow it because head master is the Master of everything!

7. citizen Aug 13
This is the difference between a free country and a non-free country. In a free country the government of the people will step in to protect justice and the legitimate interests of its citizen.

That is not about creating national champions with tax breaks or other artificial subsidies at the expense of the poor.

It is simple justice and rule of law.

The elected ruling clss over many decades have made the value of a Sri Lankan citizen below zero. Their lives are not worth much, unless they are deemed first class citizens in some discriminatory way. A business entity is also a citizen of a kind.

6. Danushka Samarasinghe Aug 13
Rohan Samarajiva’s above analysis seems to be an outcome of a personal dialog he had with yet another learned academic in an attempt of taking his debate further.

Shying away from the personal statements and on purely a factual basis I am also a supporter of Rohan’s views and a firm believer of external investment related infrastructure development vs. SL government funded infrastructure projects.

When development projects are carried out on BOT terms it relieves the burden on the SL tax payer (we have to drill down the fact that there are no SL Government funded projects but only SL tax payer funded projects) to repay the loans taken on commercial rates with other charges attached. Further seeking Non-Government equity investments for these infrastructure projects would somewhat limit financial mismanagement and also save the Government of various accusations.

Therefore when the private sector, either local or foreign is investing, such investors are considered to be financially savvy and profit focused, hence the efficacy of the project could be higher. Hence Minister Amunagama’s proposal to convert debt to equity and handover operational rights of assets build under Chinese loans is timely, though returning of the assets to the SL government should be mandatory after a mutually agreeable time period.

5. gayan Aug 13
Is stating a fact that everyone knows a poor ending?
4. vichara Aug 13
"Hambantota is a fully Sri Lanka owned port that has taken high-interest Chinese loans. It has failed to attract ships" Ships will come only when the bunkering and other facilities are made available. A poor ending to a good article?
3. imal Aug 13
Spence was pushed out.. .. it was to take a loan from a chinese bank, which pulled out at the last minute.. thus leaving spence stranded, and chinese company (having money) upped its stake..
2. citizen Aug 13
Yes, nationalism should have no place in business, only competition and what is the best price.

But there was a concerns that Spence was 'edged out' and that should be a matter of concern. A Chinese bank was supposed to fund it, then said no, according to some reports requiring more equity rather than debt, effectively locking Spence out.

The question is was it an orchestrated strategy to edge out a citizen-owned business by a state-owned one? If so by whom? Of course 500 million or more was given.

If so it is a case of state power triumphing over lowly citizens and true capitalism. If Spence had remained in the project would have strengthened their case in Africa and elsewhere.

Compare what happened to Spence in a deal with a state entity and what happened to MillenniumIT partnering with Colombo Stock Exchange, essentially a citizen-controlled outfit.

1. mg Aug 13
Nice piece Prof.