Sri Lanka’s port development and the role of the BRI

By Pabasara Kannangara

theasiadialogue.com: Sri Lanka is strategically located at the centre of the Indian Ocean and is in close proximity to the traditional east-west shipping route. As Sri Lanka gears up to become a regional hub, many other countries are turning to port development to accommodate growing volumes.   India, for instance, has launched the Sagarmala initiative, a $ 126 billion port-led development project designed to address India’s capacity constraints. This initiative is likely to undermine the growth of Sri Lanka’s maritime sector. Added to which, Sri Lanka’s worrying debt situation also means that there is limited fiscal space for the much-needed infrastructure investment in the sector.

This article argues that by leveraging global initiatives such as the Belt and Road Initiative (BRI), Sri Lanka may be able to stay ahead of the competition and achieve its ambition of becoming a major hub. However, a strong domestic policy framework needs to be in place in order to secure the envisaged economic gains.

The infrastructure financing gap

The Indian Ocean region is a rapidly growing maritime space. By 2025, it is expected to account for 22.1% of World GDP at PPP rates. Sri Lanka being an island nation with a relatively small domestic economy relies heavily on maritime trade. In 2017, Sri Lanka had a container throughput of 6 million TEUs1, accounting for 24% of the South Asian market.  However, 42% of Sri Lanka’s container throughput is from the Indian transshipment trade. 

Hambantota Port was a crucial investment as it increased Sri Lanka’s ability to accommodate greater volumes and diversify into other port-related services

Given the degree of its dependence on India, it is likely that Sri Lanka will be adversely affected by Sagarmala. One of the key obstacles for Sri Lanka to improve the maritime sector is the large infrastructure financing gap. With a heavy dependence on public sector financing and a simmering debt crisis, Sri Lanka has been finding it difficult to inject the necessary funds.  As such, the Belt and Road Initiative (BRI) poses as an opportunity for Sri Lanka to secure the required infrastructure financing.

The Belt and Road Initiative: transforming Hambantota Port

Many argue that Chinese financing has led to a debt trap in Sri Lanka, but these investments have also positively contributed to the maritime sector as a whole. The Hambantota Port project, which initially started back in 2009, is now considered to be part of the Maritime Silk Road under the BRI. However, the port performed poorly once it was operationalised, operating at a loss. Consequently, in December 2017, the Sri Lanka Ports Authority (SLPA) renegotiated a deal with China Merchant Port Holdings (CM Ports), where CM Ports injected $ 1.1billion for an 85% stake and 99-year lease. This included an additional 15 acres for the industrial zone, and a greater presence of the Sri Lankan Navy was permitted.

There are three main ways in which Chinese investment has transformed Hambantota Port: the introduction of a port-related industrial zone; improvements to connectivity; and the sharing of best practices.

Hambantota industrial zone

One of the key measures taken in order to improve profitability was to capitalise on Hambantota’s strategic location by setting up a port-related industrial zone. The port is located 6 nautical miles from the traditional east-west shipping route, where roughly 36,000 ships – including 4,500 oil tankers – use the route every year.

The locational advantage means that Hambantota Port is well connected to a broad maritime network. As such, the industrial zone will attract industries that are looking to connect easily to their regional markets.  Some of the services that would be offered include modern bonded warehousing, ship repairs and transshipment facilities. So far, there have already been 30 Expressions of Interest from various firms to invest and set up in the zone.

Connectivity

The China Merchants Group has businesses in many sectors including finance, property and transportation. CM Ports was also ranked fifth on Lloyds Top 10 World Port Operators in 2018, with a port network of 34 ports spanning across the globe from Houston, USA to Newcastle, Australia. Sri Lanka can therefore benefit from joining this transnational port network, which would allow it to expand its external linkages and improve connectivity. As shipping lines often use both direct-shipping and transshipments to improve global coverage, being part of a well-established port network would give Sri Lanka an advantage over some of its regional competitors.

Best practice

As a result of these investments, Sri Lanka has also been able to benefit from technology and knowledge transfers. For instance, RORO (roll-on/roll-off) services, which are commonly used to transport vehicles, require processes to be efficient in order to reduce costs. One year after the 2017 Hambantota Port deal, RORO throughput increased by 20% (2017/2018).

By March 2019 the port had already reached 20% of its total RORO throughput for 2018, signalling a strong positive outlook. CM Ports has made efforts to improve efficiency by implementing best practices and processes. As a result, Hambantota Port was able to sign two Terminal Service Agreements early in 2019 with major shipping lines Hyundai Glovis and Hoegh Autoliner, both expected to bring in big volumes from the European and Indian markets.

Thus, Chinese investment has helped Sri Lanka alleviate some of the capacity issues that exist in the sector. Hambantota Port was a crucial investment as it increased Sri Lanka’s ability to accommodate greater volumes and diversify into other port-related services. In addition, through international linkages developed as a result of this investment, Sri Lanka stands a chance of being able to expand its maritime network, improving port connectivity. The modern processes and new technologies that have been adopted will also enable Sri Lanka to compete better with regional markets.

Strengthening the domestic policy framework

However, for Sri Lanka to ensure that these investments have a significant economic impact, certain domestic policies need to be implemented. To begin with, a National Port Strategy would be helpful to understand how Sri Lanka should move forward. This would ideally encompass an integrated transport and port strategy and be drafted in line with the Vision 2025 goals.  By analysing and optimising the right modal mix, Sri Lanka can become more prudent with regard to infrastructure expenditure, implement forward-looking policies and ensure that projects are chosen based on the correct metrics.

In addition, more needs to be done to level the playing-field between foreign and local investors to ensure more equal returns and a better balancing of risk and control. Through open dialogue with China, Sri Lanka would be better able to understand how to maximise these investments. This could include discussions on negotiating better loan terms and exploring backward linkages to strengthen ties between the two countries further.

Finally, Sri Lanka should also work towards ensuring political stability. The recent Easter Sunday terror attacks were a major shock to the world.  The security forces were immediately given strict instructions to contain the situation and efforts were made to arrest the culprits. However, ethnic clashes have begun to break out, disrupting society and posing a threat to the lives of many. Better security mechanisms need to be implemented, including enforcing the rule of law. Failure to do so would derail the growth prospects of the economy and discourage future investment.

Conclusion

Sri Lanka’s ambition to become a regional hub in the Indian Ocean reflects the nation’s intention of remaining a competitive player in the region. However, given tight budgetary conditions, the infrastructure financing gap continues to be a major obstacle. By leveraging global initiatives such as the BRI to develop infrastructure and improve connectivity, Sri Lanka could stand to gain. Chinese investment into these ports not only financed the necessary infrastructure but also provided the technology and modern processes needed for Sri Lanka’s ports to compete in a competitive regional market. By providing diversified port-related services and creating an environment that is attractive to new shipping lines and businesses, Sri Lanka may be able to develop a stronger competitive edge. However, Sri Lanka also needs a robust domestic policy framework to ensure that these economic gains can be realised.

Image credit: Katharine Adeney

(Source: https://theasiadialogue.com/2019/05/24/sri-lankas-port-development-and-the-role-of-the-bri/)

1A TEU (twenty-foot equivalent unit) is a measure of volume in units of twenty-foot long containers.

(Articles published by The Asia Dialogue represent the views of the author(s) and not necessarily those of The Asia Dialogue or affiliated institutions.)

Pabasara Kannangara is a Research Associate at Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI) in Colombo, Sri Lanka