Nationalism vs. economic realities: The other side to Hambantota

By Ravindra Galhena Background

The idea of building a seaport in Hambantota came to the fore around the second half of the 1990s. The writer recalls presenting a paper in the year 2000 or so at a conference organised by the Institute of Marine Engineers of Sri Lanka in Colombo to discuss the prospects of the proposed Hambantota Port. 

Hambantota’s close proximity to the East-West shipping route (six to 10 nautical miles) and the possible water depth of 18+m were the main attractions that instigated this greenfield development discussion. One of the initial proposals was to provide bunkers, provisions and other services to the vessels that pass to and from Singapore on the East-West route. The number of vessels that pass through Hambantota area was estimated to be about 200 a day, but it’s needless to mention that the country required a viable business proposition to exploit this opportunity.

If it is recalled right, the consensus arrived at the said conference was to start the Hambantota port small for services initially and grow with the real demand going forward. Some professionals thought that Hambantota could even be the future home for the container shipping business too at the time. But the country was also contemplating the idea of Colombo South Harbour (CSH) to create additional box handling capacity.

Hambantota Port development

After the feasibility studies, the authorities decided to go ahead with the infrastructure development plans of both CSH and Hambantota Harbour. The funding of the breakwater for CSH came as a sovereign loan mainly, but its terminal development work was planned to be implemented on PPP basis in a few stages as the demand grows. 

But the development work of Hambantota took a different turn altogether. The then Government opted to obtain loans for the entire development (Phase I and II) plans although the economic/commercial prospects were not that clear at least in the short to medium run, in the view of  the writer. 

Sri Lanka Ports Authority (SLPA) formed a 100%-owned subsidiary called the Magampura Port Management Company (MPMC) to manage the Hambantota Port. This company obtained four loans for the said two stages as follows:

Phase I – A total loan of $ 460 million with interest varying between 2% to 6% – which was considered to be very attractive at that time. This facility was commissioned in November 2010 but didn’t have any considerable workload until 2012. 

Phase II – A sum of $ 760 million (two loans) at 2% annual interest and the facilities are in operation partially now. But, they do not seem to be in much use currently. The lender was The Export-Import Bank of China (China EXIM Bank) and the total borrowings were amounting to $ 1.22 billion as at December 2016. 

As SLPA mentioned in its website: “The harbour (Hambantota) area is basically protected by two 312m and 988m long two breakwaters. An access channel of 210m width and 17m depth is provided with a turning circle of 600m diameter and 17m deep to facilitate vessels up to 100,000 DWT.”

Development of terminals and RO/RO business

The Hambantota harbour enclave houses a RO/RO (roll on/off) terminal (600m) 2 x oil terminals (300m each), a multipurpose terminal (838.5m) and a container terminal (838.5m). The land allocation for the port (the proposed Phase III included) is 4,000 acres (16 square Km). The MPMC employs a large skilled and unskilled workforce at present and technically they do not belong to SLPA. 

Although MPMC owns a few terminals, the main operation that takes place at the port; is the servicing of RO/RO carriers. This was initially a transfer of operation the Port of Colombo made, as a solution to the space challenge they faced. However, this business has now grown at Hambantota due to the transhipment opportunities MPMC managed to exploit. 

The regular RO/RO operators include Hyundai Glovis, Eukor and K Line. Other than that there are only a few ad hoc passenger/bulk carriers that patronise the port. The two quay container cranes seem idling without any work whatsoever and the writer is surprised about this investment given the nature of the today’s container business in general and our container port business in particular (75% transhipment in Colombo). 

Financial feasibility of the operation

The current financial and operational position of MPMC is as follows: As per 2016 financial performances, MPMC earns an annual revenue (estimated) of $11.7 million from the operations and another $0.11 million as other income. The annual expenditure totals up to $10 million ($6.6 million as direct costs and $3.4 as administrative expenses) and this spares a $1.8 million as operating profit. 

This profit has been somewhat alright up to now as the loan repayment has not kicked in yet, but the loan repayment should commence in 2018. For example, as per the calculations, the loan repayment for 2018 is to be $64.4 million while the operating profit would be a meagre $2.6 million! The loan repayment will escalate when the instalments become due for the Phase II loan/s and the breakeven would not be at sight for a foreseeable future (at least for 15-20 years from now) even the operating profit grows by 20% a year!

Let’s go back to basics; the bottom line of business is profit. If a business is run without returns, it’s waste of time, effort, energy and resources. So, this business is no exception, as per the affairs of date and the forecasted financial performance, the situation could only go from bad to worse as the time goes by. 

Therefore, the Government is forced to look for alternatives to curb this erosion which is a great burden to the country and Government coffers. This warranted a deal with some viable entity that is capable of turning this “white elephant” to a profitable business venture in order to be a winner.

As the country now learns, the MPMC facilities are being leased out for 99 years from January 2017 on PPP terms on an 80:20 shareholding to China Merchants Port Holdings (CMPort). 

The writer believes that patriotism manifests in different forms and shapes, and should be taken in the right context. Patriotism cannot be necessary asking for more for the country in terms of quantity and losing the whole opportunity in the end. Sometimes it could be just making a workable arrangement with an outside entity on a compromise to work the business for a vital common purpose and becoming a winner with others (win-win) rather than destroying the opportunity completely.  

This decision is something that falls into the latter, isn’t it? Shouldn’t our patriotism be considered within the context of economic realities? This is the question we should ask ourselves! 

The selected credible PPP Partner

China Merchants Port Holdings (CMPort) is selected as the PPP partner. CMPort’s core business portfolio includes global port/terminal operation, investment and development. It is considered as the world’s second largest port/terminal operator by total throughput. CMPort has established its presence across four continents, 15 countries and in 28 ports. This is a Hong Kong listed blue-chip company that is included in the Hang Seng Index. 

CMPort was awarded as the ‘Port Operator of the Year’ at the Lloyd’s List Global Awards held in the UK in September this year. Lloyd’s List’s sister publication, Containerisation International recognised CMPort as the Container Terminal Operator of the Year in 2015. (http://www.cmport.com.hk/EN/ for more details)

Recent Hambantota Port strike and its detrimental effect 

The recent eight-day port strike, which brought the port to a complete halt, destroyed the hard-earned RO/RO business of MPMC to a large extent. Some shipping lines are angry over the disruption and threatening to discontinue the port call and transhipment operation there. The press reported that K Line has sent a bill claiming $0.4 million as damages for the loss of time. Also the insurance companies have increased the premium for Hambantota Port call and these increases even could put the operations at Hambantota out of financial viability totally for the carriers. Rebuilding the RO/RO business for Hambantota could be an added challenge for CMPort now! 

As per the writer, the pros and cons of this lease for Sri Lanka would be as follows:

Advantages:

1.Sri Lanka’s hard earned foreign exchange drain that will trigger with the commencement of repayment of loans (in 2018) will come to a halt as CMPort will pay $1.035 billion to the Government for the takeover. This will reduce the country’s burden on concentration of loan repayments. (However, there can be a deficit between existing loan and the proposed payment by CMPort. Perhaps, that difference may have been set off against the SLPA’s stake). 

2.This arrangement completely takes off the country’s risk of owing an unproductive asset. The future public money swallow ups for maintenance of port etc. have been taken off and will never be a burden on public funds.

3.The global port giant CMPort will hopefully do everything in its power to make the Hambantota port a viable, profit making venture. This will hopefully bring a decent dividend for the 20% SLPA’s shareholding. In other terminal concessions, SLPA has got only a 15% stake. However, as per the press, the Minister of Port and Shipping is unhappy with the stake SLPA is given and trying to negotiate for a larger share.  

4.The auxiliary and ancillary port services could grow with equal treatment to prospective third-party service providers that would make Sri Lanka a true hub for those services in the global market (e.g. bunkering, provisions). In other words, these operations would be more efficient, effective and professional with a seasoned operator.  

5.If the port does well, the employment prospects for the people would increase with added advantages such as higher income and fringe benefits that MPMC cannot afford at present.  

6.This arrangement would work well with the Government’s plan to lease out 15,000 acres in Hambantota area for industries/free trade zones, etc. Hopefully, the port will efficiently cater to the specific import/export needs of these investors in the future.

 

7.There can be other synergies that will emerge on the country’s economic activity if this port is put to its best use by the new managers. 

8.CMPort would need to invest a minimum of another $ 400 million on the state-of-the-art equipment and superstructure in order to make the container terminal (in phase II) operational – this is something the SLPA would not be able to afford at this juncture.

Disadvantages:

1.It’s a 99-year long lease and the state would not be able to use it for a long period. However, the authorities are able to review the terms and conditions every five years after the initial 15 years. This will give an opportunity to renegotiate the country’s benefits according to the economic realities that will prevail at the time of periodical reviews. 

As reported in Daily Financial Times (FT) on 19 December, the Public Enterprise Act that will be introduced to the Parliament early next year will look at restructuring of 55 loss-making Government enterprises including the SLPA. The loss incurred by SLPA is to the tune of Rs. 9.5 billion in 2015 and struggling to keep head above water at present!

The Government says that the country is in a huge cash trap and struggling to service its colossal loans. Owing to this, the local taxes were increased a couple of months ago. As the proceeds of this particular lease comes to the Government’s consolidated fund, we as citizens would expect that the Government would be prudent to clear off the high-interest loans first to enjoy the best use of the opportunity.  

(The writer is a Maritime Consultant and can be contacted by email [email protected].)