Why Sri Lanka needs China to continue as a transshipment hub in the Indian Ocean

As ship sizes increase they make fewer port calls but larger box exchanges. However, mega-ships can only be profitable when fully utilised, without too many port calls. Therefore, ports may lose direct calls for trade lanes where it has limited amounts of cargo unless that port has transshipment cargo

By Maya Majueran

Transshipment

Today there are challenges related to the port calls to the container terminal. These days the trend of using larger container vessels has become obvious. Shipping companies believe that the voyage cost per twenty-foot equivalent unit (TEU) would be reduced by increasing the capacity of vessels. This may limit the maritime access of mega-ships to all the ports due to draft restrictions and increase of port facilities and equipment, because of that larger container ships normally call at fewer ports. As ship sizes increase they make fewer port calls but larger box exchanges. However, mega-ships can only be profitable when fully utilised, without too many port calls. Therefore, ports may lose direct calls for trade lanes where it has limited amounts of cargo unless that port has transshipment cargo. The majority of transshipment cargo are containers (primarily for merchandised goods transport) and roll on – roll off (RORO) (wheeled cargo, such as cars, trucks, semi-trailer trucks, trailers, and railroad cars).

A transshipment typically occurs when there is no direct shipping route to any specific destination, port is not able to accommodate big vessels and to move cargo from one country to another by transshipment to evade trade restrictions. In that case shipment will be transferred from one vessel to another whereas in transit. For example, if a shipping a container from Kolkata, India to Germany, there is an option for a direct vessel that departs a port in Kolkata and arrives directly in Germany. However, there is also a transshipment route that will first have the ocean vessel sail to Colombo, where the container is unloaded from that vessel, and placed on another vessel for Germany. This is typically done to save money on shipping costs. But it takes more time, and it leads to increased transport times.

Challenges 

If a country or neighbouring country has multiple ports, this fragmentation could not only mean a duplication of infrastructures, but also risks to de-concentrate cargo flows, which might undermine the possibility to attract many calls, for which sufficient cargo volumes are needed. Therefore, port concentration will increase the urgency to improve its attractiveness. With the competitive nature of the liner shipping industry, the transshipment hub port selection process has become complicated with numerous decision-making criteria that need to be considered, and competition between hub ports has accelerated across different regions. 

These are some of the consideration to be a transshipment hub port: location, port accessibility, port superstructures, port traffic, number of services calling at port, availability of dedicated/own terminal, performance of the port, frequency of delays, records of damages, port handling charges, financial clearance capability, efficiency of husbandry services, marketing efforts, personal contacts. A transshipment cargo can easily be moved to new emerging hubs if the port loose the competitiveness. 

There are more than 200 ports in South Asia, concentrated largely in India, but only about 20 of them handle more than 9,000 TEUs of containerised cargo annually. All South Asian container ports except for the Port of Colombo handle mostly cargo coming from or going to their hinterland. Sri Lanka, whose market is dominated by transshipment, is the second largest player in the region, with throughput of more than six million TEUs in 2018. Colombo port is mainly a transshipment hub with 80% of throughput coming from transhipment. 

India is by far the largest container market in the region, moving more than 16 million TEUs in throughput in 2018. Pakistan (3.2 million TEUs) and Bangladesh (2.8 million TEUs) handle smaller volumes of cargo. Maldives handled less than 100,000 TEUs in 2018. Container trade around the Bay of Bengal is almost exclusively based on the feeding of containers to large container ships at hub ports such as Colombo, Port Klang and Singapore.

The sizes of container ships calling at container terminals are not determined solely by the capability of the ports to accept ships, but also by the availability of efficient terminals and supporting soft infrastructure. Distance from the major container trade lanes may also be a factor. With Sri Lanka’s central location and ability to cater to the East-West route with such ease, more and more shipping lines will find it beneficial to call Sri Lanka as opposed to other ports in the region. 

Strategic geographical advantages 

Even though Sri Lanka has strategic geographical advantages where global and navigational contexts were concerned, its strategic position alone will not support it to be a logistics centre. Aceh ports in Indonesia are a good example for not employing various strategies. Aceh, geographically, has locational advantage of being positioned at one of the world’s busiest shipping lanes of the Straits of Malacca. Furthermore, Aceh has a lot of unique resources that can be used to complement for the port growth. Despite having those values and resources, Aceh port system is still having problems to grow as major and dynamic ports in Indonesia and in the region. 

Aceh ports are surrounded by and in the shadow of world huge and busiest ports like Port of Singapore, Port Klang and Port of Tanjung Pelepas that always enhance their advantages and values that likely difficult for other ports in the region to compete. 

Indeed, the Indian government, through its Sagarmala initiative, is building six new major ports, including Colachel at the southern tip of Tamilnadu state and Vizhinijam, a short distance north in the state of Kerala, in what appears to be an effort to reduce reliance on Colombo. India has a high potential to obtain a significant portion from the transshipment handling market of India and Bay of Bengal countries. 

Indian ports plan to offer Mega container terminal points and specialised facilities to take charge of larger vessels which might be a commercial threat to Sri Lanka’s transshipment activities. If other ports and container terminals in India can attract direct calls from major container shipping lines that will affect the potential for Sri Lanka to be transshipment hub. 

Sri Lanka as a transshipment hub

Therefore, Sri Lanka will only be able to take advantage of this opportunity if Sri Lankan ports can cater to the requirements of the large container ships these shipping lines are adding to their fleet. Further Sri Lanka still lags behind a number of the region’s other leading hubs, including Hong Kong, Singapore and Dubai quality when it comes to its logistics services, physical infrastructure, technology and new types of service providers. 

Likewise, Sri Lanka is encountering challenges in access to a sufficient number of qualified professionals and international participants in the field. Sri Lanka was ranked 92nd out of 167 countries in the World Bank’s 2018 aggregated Logistics Performance Indicator (LPI) combines the four most recent LPI editions. Scores of the six components across the 2012, 2014, 2016 and 2018 LPI surveys were used to generate a “big picture” to better indicate countries’ logistics performance. 

Sri Lanka scored 2.64 on logistics competence (competence and quality of logistics services, e.g. transport operations and customs brokers), the compared to India’s 3.18, UAE’s 3.83, Hong Kong’s 3.94 and Singapore’s 4.08. This indicates a need for Sri Lanka to improve physical infrastructure and human resources development. 

Furthermore, Hambantota port was an example for not employing various strategies. Operation of Hambantota port did not generate sufficient revenue to match the debt obligations pertaining to the loans obtained for the project. Although port operations started in 2011, following the completion of phase one of the project, Hambantota port was incurring losses until the port was leased to China Merchants Port Holdings Company Limited (CM Port). 

Since that CM port has been ramping up efforts to help the port back on its feet and still facing a great deal of pressure. However, there is a hope that CM Port would bring the advantages in the areas of operational skill, market power, commercial relationships, marketing skills, technological expertise and access to cheaper sources of finance which are paramount important to attract significant traffic to Sri Lanka. 

The Port of Colombo is ranked the 13th best Connectivity Port in the world in the 4th quarter 2017. According to the rankings the Port of Colombo is also the top best connectivity port in South Asia. Colombo Port has been ranked for the 23rd place and ranked among the world’s best 25 ports in accordance with the Alphaliner rankings in 2017. Colombo port has a higher Liner Shipping Connectivity Index (LSCI) than any Indian port. A joint venture $ 500 million Colombo International Container Terminal (CICT) operated by China and Sri Lanka at the Colombo South Terminal in the Port of Colombo handled a total of 2.9 million TEUs or 40% of volumes at Colombo Port in 2019. 

Ultra Large Container Carriers (ULCC) contributed to 72% of CICT’s volumes as the terminal is the first and only deep-water port in South Asia capable of handling the large vessels afloat. However, at present only two vessels with a length of 360m can be accommodated in the port of Colombo at any given point of time. This should increase to more vessels if we are to attract multiple east-west services to the port of Colombo, along which over approx. 300 vessels pass by every day.

The way forward

The Sri Lanka government had signed a diplomatic “memorandum of cooperation” (MOC) with India and Japan for a tripartite effort to develop the strategic East Container Terminal (ECT). Although the MOC was completed last year, a formal agreement for the terminal development is yet to be signed. India is planning to field the India’s Adani Ports and Special Economic Zone Limited (APSEZ), the country’s biggest private port operator as its nominee in partnership with a local company to develop and operate ECT. The trade unions have been pressing the government to abandon the MOC and develop the terminal as a 100% Sri Lankan venture. Global shipping giant Maersk also expressed interest in developing the ECT in close partnership with the Sri Lanka Ports Authority (SLPA).

Global shipping lines and local agents have been complaining about the delay in adding container handling capacity at Colombo port where commissioning of the ECT has been delayed for years. If ECT developed fully, ECT will be the deepest container terminal at the Port of Colombo, capable of berthing massive ships, container vessels and oil tankers. Increasing capacity through converting the East Container Terminal (ECT) and completion of West Container Terminal (WCT) just next to the CICT to an operational level at the Colombo Port and investing in infrastructure and other ancillary services would allow further growth. 

The presence of Japan and India in the Colombo Port with China’s CICT will improve its business outlook and value through transshipment activities. Increasing multi-country consolidations is a big part of transforming Sri Lanka into a global maritime logistics centre in the Indian Ocean. However, for many years, India has been trying to cut its dependence on Colombo port and wanted to do more of its own transshipment business. Under the Sagarmala project, New Delhi expects the new Indian ports will save Indian companies extra time and hundreds of millions of dollars in transport costs. The ability to access the CMPH global network was the key factor in gaining and attracting new transshipment volumes to the Port of Colombo.

Therefore, partnering with a global maritime player like China is the most practical way to fulfil our plans for maritime development and connectivity. They possess some competencies that would bring the advantages in the areas of market power, marketing skills, technological expertise and access to cheaper sources of finance. 

(The writer is a Ph.D. candidate at the University of Kelaniya, researching the BRI, and Director of BRISL.)