YAHAPALANA AND THE ECONOMY Part 7
Posted on March 29th, 2018

KAMALIKA PIERIS

Yahapalana wishes to kill the Shipping Agent” sector of the shipping industry of Sri Lanka. Yahapalana announced in its 2017 budget that Sri Lanka Ports Authority Act, No. 51 of 1979 and the Merchants Shipping Act, No. 52 of 1971 will be amended. Restrictions on foreign ownership of shipping agencies and the freight forwarding agencies will be lifted. This will enable major international shipping lines and logistics operators to base their operations in Sri Lanka.

Sri Lanka must liberalize its ‘shipping industry’ to attract the top global players such as Maersk to invest in Sri Lanka, said Mangala Samaraweera, Minister of Finance. Other leading shippers and freight forwarders are likely to then follow suit. At present a foreign entity cannot own more than 40 percent of a shipping company in Sri Lanka. No shipping line will invest with only 40% equity stake and no control over the operation. They would expect to at least have control over their operation and not a minority stake. The choice of having an agency or not should be the wish of the owner of the business who brings in vessels to port in Sri Lanka and regional cargo to Colombo, continued Yahapalana .

We need to seriously consider allowing up to 100% foreign ownership in cases where the shipping company would make a significant investment over a period of time, continued Samaraweera. Liberalization of shipping agencies will reduce transaction costs and this will help shipping lines like Maersk to further increase volumes especially given the growth of new transshipment hubs in this region, India and Pakistan have fully liberalized their shipping industries, he concluded. Maersk, the world’s largest container shipping line promptly responded. They applauded removing the restriction on foreign ownership of shipping agencies and amendment of the Merchant Shipping Act.

This budget proposal was as a great shock to the shipping agents. Ceylon Association of Shipping Agents (CASA) and Sri Lanka Logistics and Freight Forwarders Association (SLFFA) stated that they strongly opposed the proposal to open the Shipping sector for foreign investment, by removing the remaining restriction of 60% on foreign ownership in shipping and freight forwarding agencies.

They immediately pointed out two specific flaws in the Yahapalana argument. Liberalizing of shipping agency will have no effect on freight rates. Shipping agents do not control freight rates they said. That is a matter for the shipping lines. They also commented on the Yahapalana statement that there would be ‘an independent Ports regulator’. CASA noted that there is no mention that the “independent port regulator” will be totally national and local. It could include foreign involvement and that would have grave national security implications.

Representatives of shipping agents met Finance Minister Mangala Samaraweera and urged him to withdraw the proposal of removing foreign ownership restrictions in shipping agencies, but Minister Samaraweera refused. A few shipping agency houses are benefitting as they are controlling the many shipping agencies under their belt, he said. A full page advertisement in Daily News, inserted by Ministry of Finance, said India, Singapore, Vietnam, and Hong Kong have fully liberalized their shipping industry.

The Ceylon Association of shipping agents (CASA) responded with their own notice to public. CASA is the leading voice of the shipping industry in Sri Lanka, they said. CASA consists of 130 registered members, and consists of agents representing all major container lines and non container vessels calling at all ports of Sri Lanka. The industry has over 750 local shipping and freight forwarding and clearing agents, mostly SMEs, employing over 12,000 direct staff.

The main role of the shipping agent is to facilitate all formalities for the vessel call. Local shipping agency and freight forwarding companies have already meet the local demand of that component. They have already invested in the container depots, freight stations, logistics parks, transportation, and other required infrastructure to support the shipping lines’. There is hardly any work left for foreign companies to do.

CASA states the shipping industry in Sri Lanka is already liberalized. Any foreign ship owner can freely operate their vessels in Sri Lanka. All major container shipping lines have service operating here. They also operate container terminals here, such as SAGT. he port of Colombo is a destination for all major lines and all the major shipping lines are already Sri Lanka.

Foreign entities can have 100% ownership in terminals, warehouse and depot infrastructure, ancillary service infrastructure etc. they can have their own offices, if they wish. But we are yet to see foreign investments taking place in these sectors. Maersk had all the opportunities to invest in a gamut of activities, why have they not invested up to now?
The only aspect which is not liberalized is the shipping agency/freight forwarding functions. Foreign parties have held 40% ownership for the past 20-25 years in shipping agency but no investments have been made in shipping. So how can allowing 100% encourage them to invest? International mega shipping companies will not immediately set up their offices in the country, investing massive sums of money. The only matter they have shown an interest so far is in Eastern Container Terminal ECT where all major shipping lines and terminal operators submitted bids. Hereafter too, shipping firms will focus only on the container segment. They will not be interested in developing or promoting the other segments of the industry.

All major shipping lines and freight networks are currently represented in Sri Lanka and the lifting of restrictions will not bring any new shipping lines or freight networks into the country. There will be no new investments by shipping lines and freight forwarders as a result of this policy change either. The proposal will not bring any significant benefit to the industries and the economy and in fact will have an adverse impact to the national interest of the country, CASA said.
CASA has listed the disadvantages to the county if the proposed change is made. All profits of shipping agency will be repatriated. They will not be retained and reinvested within the country as done at present by existing local agents. The shipping lines will make their Colombo offices cost centers and the foreign exchange earned by the local shipping agents and the tax earned by the government will be totally lost.

Shipping lines having 100% owned agencies will apply charges which are levied globally (eg.THC) and also put pressure on the port tariff to reduce its rates. Freight forwarders and shipping agencies physically take custody of goods worth billions of dollars per annum. When ownership and directors are all foreign then it would be so much easier for them to simply vanish with goods. This is happening in Singapore, Hong Kong, and India.

The proposal to liberalize will also affect the local agencies. Shipping lines may choose to offshore processes, and bring in expatriate representatives. Further, the management positions will be filled by expatriate staff depriving Sri Lankan professionals. There will be a significant impact on employment of local staff. Foreigners from India, Pakistan, Bangladesh, and Singapore will set up small agency offices for casual caller vessels and reduce business available to local SME agents. Foreign owners will get controlling interest of agency/freight forwarding companies. This will restrict the growth of these companies and their capacity to invest in other businesses, as the local agents have done.

Sri Lanka has a very mature local shipping agency industry. This position will be jeopardized with this new policy change. Liberalizing the shipping agency sector, will lead to the death of the local industry. The jobs of a workforce of 12,000 will be at stake. They will lose their livelihood. The enterprises may have to close down. This will include the hundreds of local companies who have contributed immensely to the development of the maritime sector in this country over the years.

Liberalizing shipping will not make Sri Lanka a maritime hub. A maritime hub consists of infrastructure, capacity, and services, of world class facilities for air and seaports, catering to all sorts of ships and also offering technical and commercial services such as finance, brokering and insurance.

There is no need to liberalize the shipping agency business at this stage. Liberalization will have an adverse effect on our economy it will discourage local entrepreneurship and building of strong local shipping companies. It is important that any policy change should be discussed with stakeholders, said CASA. Countries need to do what is best for their economies depending on their comparative advantage and local resources. All middle east nations, as well as Thailand, Indonesia have limitations in foreign ownership in shipping agencies. Liberalization of this service sector without any form of investment is detrimental to local entrepreneurship and local businesses.

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