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Monday, 10 March 2014 00:00 - - {{hitsCtrl.values.hits}}
The geographic location of Sri Lanka will be a key factor for shipping and logistics, especially for the container shipping industry which accounts for 52% of global trade value (2013) and 74% of transshipment volume through the port of Colombo. In the recent weeks different opinions have been expressed by the industry on the subject of liberalising the shipping economy.
With the increase capacity and modern container terminals in Colombo, the container shipping sector will benefit immensely, but as competition grows they will demand greater productivity, efficiency, and ease of doing business environment. As an emerging maritime nation and known as the most liberal economy in South Asia, Sri Lanka will be competing for shipping and logistics traffic as it aspires to be the regional hub. The Government of Sri Lanka will have to create an environment that would be equal or progressive to existing shipping hubs in the region. The three main regional hubs, namely Singapore, Malaysia and Dubai have fully liberalised shipping and logistics while India and Bangladesh too have 100% liberalised the sectors. In Sri Lanka its 40% for foreign shipping companies, as logistics is now liberalised 100%.
Sri Lanka should not expect these sectors to develop with too much protectionism. In my view shipping and logistics have distinctive functions and the two should be treated differently. They are the two sides of the shipping economy that has to be looked at independently.
Logistics liberalisation
As correctly done by the Government, the 100% liberalisation of the logistics sector is the way to move forward, in fact it was a correction of a dichotomy, where prior to the gazette of 1717/6 of 2011, five logistics companies were given 100% ownership through BOI investments, however due to the said gazette these international companies were in a dilemma to get the licenses renewed as a restriction was brought in 2011 restricting foreign ownership to 40%.
In the case of logistics operators, Sri Lanka does not have an absolute advantage over the region unlike shipping; therefore it is important to attract large international players to the country, where they would have the economies of scale and the capacity to bring in regional volumes and do hub operations from Sri Lanka. In fact the commercial hub regulation gives a tax free environment for logistics companies within selected investment zones. At the same time in the domestic investment environment Sri Lanka has the lowest corporate tax regime in the subcontinent for shipping and logistics, which was introduced in the 2014 Budget. Compared to 33% and 35% in India and Bangladesh, Sri Lanka now has 12% corporate tax for the sector which is in line with the export sector and is ahead of Singapore’s 17% (subject to a three year grace period etc.).
At the same time presence of large number of logistics companies would also increase better logistics solutions/options for our trading community and would give exporters and importers better choice in services and pricing. Being a small economy, we need regional cargo flows through Colombo to increase our base cargo load to further support the maritime hub. That can be achieved only through global logistics providers being present in Sri Lanka.
In fact Singapore has one of the highest densities of logistics companies in this part of the world, where both Singaporean companies and international players provide supply chain solutions for the region. Increased logistics services activities and knowledge and capacities of such service providers will give strong signals to others to invest in Sri Lanka, considering the emerging consumer markets in the South Asian region.
Sri Lankan entrepreneurs in logistics should not be scared of competition and they should not focus only on the domestic market. For all of them the message is clear, that the Government wants our entrepreneurs to become regional players, to be innovative and to bring regional business to Sri Lanka. While the domestic pie is small, Asia offers many opportunities for our companies to promote Colombo as the regional distribution centre. Logistics companies in Sri Lanka need to upgrade them to provide greater value addition which is demanded by the international market place.
Liberalising shipping
On the other hand liberalising of shipping should be considered in a more cautious manner with rationality and strategy. In my opinion certain areas should not be liberalised on a platter. The reason for this being irrespective of liberalising or not, the port of Colombo especially for containerised cargo is the most advantageous cost effective location for ship operators to transship and relay cargo in this part of the world. It is also a business that domestic industries cannot compete in as it is a capital intensive business which has turned to be an oligopolistic industry.
The liner shipping industry for containerised cargo should be liberalised only on conditional investments and major commitments. Large investments for terminal operations and other projects could still be done through the strategic investment act and the commercial hub regulations as per existing laws. However, it is important that the other segments of the shipping industry such as, cruise shipping, bulk shipping businesses should be 100% liberalised as such activities need global player presence in Sri Lanka with the development of other major ports within the country.
The non-liner business related to bulk, break bulk and other shipping services have an extremely low presence in Sri Lanka. If liberalised they may invest in bunkering, salvage operations and other areas related to global shipping. Increasing of such shipping activity will have enormous amounts of indirect benefits to the country.
As explained earlier, the business of transshipment of containers which is a key sector of the shipping economy along with the domestic trade should be liberalised at this moment only if serious financial investments and commitments are made by ship owners. Otherwise the tendency of ship owners would be to make Sri Lanka a cost centre which may hurt domestic businesses and the economy.
The local shipping industry leaders must advise the Government on the best solutions where on one hand we need to take a message to the world that we are a liberalised shipping nation looking to promote the country as a hub. At the same time have a list where liberalisation can only happen with large investments as the country needs to get the best benefit when we have an absolute advantage in terms of geography for transshipment with a domestic base load.
The important message is that we should not portray as a nation promoting protectionism, in a sector we want to showcase ourselves as a hub. This balanced approach should be taken in the short to medium term, but all such policy too will have to be reviewed time to time as the country progresses and migrates to the next level of per capita GDP. Right action and approach will help us climb up the logistics index and the doing business index which is looked at by the global investors.
(The writer is an economics graduate from Connecticut State University, USA and the, CEO of the Shippers’ Academy Colombo and is the senior consultant for ports and airport at the Strategic Enterprise Management Agency –SEMA)
