Shipping Industry is Already Liberalised: CASA Has its Say

Monopoly
Until 1990 the Ceylon Shipping Corporation had a monopoly on providing freight services to all importers and exporters in the Sri Lankan market. This was the pre-liberalisation era.

Liberalisation
However, during the mid-half of 1990 the shipping industry and specifically the freight market in Sri Lanka was liberalised enabling all foreign shipping lines to serve the trade under a free open market regime. In 1992, shipping agencies were opened to foreign participation allowing 40% ownership stake in the agency business. All other segments of the maritime industry such as terminals, warehouses, depot infrastructure and ancillary services infrastructure which are components required of a maritime hub remained and to date remain fully open where foreign entities can have 100% ownership. Hence, the recent calls for the shipping sector to be ‘liberalised’ seems to be a misnomer and will mislead the public and policymakers.

There is no restriction on shipping lines or logistics operators setting up their 100% owned headquarters or regional offices in Sri Lanka at present. Even the Port City offers these opportunities for shipping lines; to set up administrative regional headquarters in Sri Lanka. The proponents advocating liberalisation, seem to have confused the distinction between the operation of a shipping line and that of an agent.

Liberalised
The current regulations permit foreign ownership to handle all activities, with the only exception of shipping agency and freight forwarding which is restricted by the law up to 40%. Port/terminal owning, ship owning, ship building, building of terminals, warehousing, container depot, distribution, bunkering, entrepot trading, marine lubricants, ship chandling, waste disposal, ship repairs, offshore services, salvage and maritime security are few of the many services which are open to 100% foreign ownership.

Shipping agency
The Ship Agent role is to take responsibility for handling shipments and cargo and the general interests of its customers at ports and harbours worldwide. Ship agents act on behalf of ship-owners, managers, and charterers. The agency business requires low investment, it is asset light, low capital intensive, and service oriented with local expertise and know-how. There is no evidence of significant FDIs brought into a country purely for establishing a shipping agency. There is also no evidence from other maritime hubs in the world that ownership restriction in shipping agency business has precluded them from becoming a maritime hub. A prime example of this is Dubai which grew to be a logistics and shipping hub whilst requiring a local partner for shipping agency business until 2021. Even Western countries such as the USA still have regulations such as the Jones Act which stipulates that all coastal cargo vessels need to be locally-owned and have the US Flag. Countries such as Bangladesh and Maldives also have similar policies to help the local industry to develop and retain foreign exchange earnings within the country.

No link between agency cost and freight rates
Freight is the income of shipping lines and ship owners and are determined by cost and commercial considerations. Freight rates are fetched globally based on demand and supply for cargo between destinations and largely on the ship owners cost structure. They are based on various factors such as distance between two ports, size and costs of the vessel, crew costs and insurance and bunker costs. Port cost also form a large part of the ship owners cost structure. Therefore it is understandable that there’s no relationship between freight rates and the agency ownership structures. This is evident from the current freight rate reduction that we see in the market today where most rates have declined by over 100% (YOY) due to market factors. There is healthy competition for freight services in and out of port of Colombo with all major carriers calling with weakly services.

Unsatisfactory foreign investments
While the shipping industry has been liberalised, investment in the above sectors which constitute activities of a maritime hub have been minimal with the only exception being in the port-terminal sector. We attribute this to a less conducive macro environment and a lack of policy consistency.
We believe that merely lifting the limitation in foreign ownership of shipping agencies and freight forwarding companies will not have a material bearing on realising the maritime hub aspirations of the country. This is because shipping agency is one small aspect in the wider sphere of activities that constitute a maritime hub.

Impediments to investments
The restriction in investment in facilities and the maritime hub services is due to the lack of consistent policy, unattractive benefits, bureaucracy, red tape and delays in doing business.

If the intention of the policy change is based on the premise of developing Colombo to be a logistics hub. we as the industry believe that issues such as the development of port infrastructure and improvement in ‘ease of doing business’ by digitalisation, removal of bottlenecks/bureaucracy throughout the supply chain, low tax regime, and updating customs laws will attract investment, reduce unnecessary costs and bring significant relief to the consumer and trade.

Maritime hub aspirations
A maritime hub constitutes world-class facilities for air and sea ports which caters to container, bulk, tanker, offshore, cruise and LNG markets. A maritime hub should also offer both technical and maritime commercial services such as finance, brokering, insurance, surveying, legal and arbitration.

A maritime hub also provides ancillary services at regionally competitive rates. These services include: ship husbanding services, transshipment of cargo, multi country consolidation, bonded warehousing, sea air cargo movement, entrepot trading, bunkering, marine lubricants, fresh water supplies, offshore supplies, ship chandelling, ship layups, services to cruise ships and yachts, maritime security services, ship repairs, ship building, salvage and towage, waste disposal facilities, seafarer development and ship management.

At a macro level the policies should also entail a transparent legal framework, strong rule of law, ease of doing business, modernised customs laws, strong FTA agreement to facilitate business, all of which are provided in a competitive and cost-effective business environment. Most important is the digitalising of port processes and limiting the manual approvals processes with many hard copies and personal visits on board by authorities. We need to move Sri Lanka up the logistics performance index and also in the ease of doing business ranking as priorities before we look at other deregulation.

With the Government’s vision of becoming a true maritime and logistics hub, we need to address all the above aspects concurrently.

Country to gain
The shipping industry is not opposed to liberalisation and we share the Government’s vision of achieving maritime hub status. We would like to see the country benefit by substantial FDI before throwing open this one, small and specific area to foreign parties for 100% investment.

There are no other benefits in terms of number of services, shipping freight rates or equipment as equity holding in agency businesses are not linked to these indicators. Currently, Sri Lankan exporters and importers get the best of these services as there is clear competition among the shipping lines to provide services.

Significant contribution by local companies
In Sri Lanka, the shipping agents service over 7,300 casual caller vessels (non-container vessels) per annum. Most of this business of casual caller vessels is canvassed and promoted by the local shipping agents who are mainly SMEs. The easing of the foreign ownership restrictions will adversely affect the SMEs that handle a few ships per year. It is likely that such a move will lead to large repatriation of currency overseas, depriving the country of the USD earnings and the tax revenue. It will also have an impact on local employment. It is estimated that the jobs of current workforce in excess of 12,000 will be at stake.

When one talks of liberalisation there are many other areas and laws in shipping which could be seen as restricting the growth of the industry which should be first considered by policymakers

Some have argued in recent articles that the local agents who have represented shipping lines have not invested back in the economy which is entirely false. Most agents have not only invested in infrastructure and assets such as inland container depots, warehouses, free zones, ships and marine crafts but also has expanded regionally and globally earning much required foreign exchange for Sri Lanka. Making baseless accusations such as this demoralises local businesses that strive hard to support the Sri Lankan economy during these trying times.

These articles have also ignored the contribution made by shipping agents during the height of the war to attract ships to Sri Lanka despite the high war risk surcharges that had to be borne by the lines. Sri Lankan agents have grown the maritime industry of Sri Lanka to what it is today and is committed for further growth.