June 12, 2019 Reading Time: 6 minutes
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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 of shipping. India for instance, launched the Sagar Mala initiative, a USD 126 bn1 port-led development project designed to address India’s capacity constraints. This initiative is likely to undermine2 Sri Lanka’s maritime sector growth. Furthermore, Sri Lanka’s worrying debt situation may mean limited fiscal space for much needed infrastructure investment into 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 its competition and achieve its hub ambition. However, a strong domestic policy framework needs to be in place in order to secure economic gains.
The Indian Ocean region is a rapidly growing maritime space. By 2025, it is expected to account for 22.1% of world GDP3 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 six mn TEUs,4 out of which 42%5 accounted for Indian transhipment trade. Given the degree of dependence on India, it is likely that Sri Lanka may be adversely impacted by Sagar Mala. One key obstacle for Sri Lanka to improve the maritime sector is the large infrastructure financing gap.6 With a heavy dependence on public sector financing7 and a simmering debt crisis,8 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.
Many argue that Chinese financing has led to a debt trap9 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, was operating at a loss10 since it was operationalised. As a result, in December 2017, the Sri Lanka Ports Authority (SLPA) renegotiated a deal11 with China Merchant Port Holdings (CM Ports), where CM Ports injected USD 1.1 bn for an 85% stake and 99-year lease. This included an additional 15 acres12 for the industrial zone and a greater presence of the Sri Lanka Navy.13 There are three main ways Chinese investments have transformed the port; introduction of a port-related industrial zone, improving connectivity, and sharing best practices.
One of the key measures taken to improve profitability included setting up a port-related industrial zone, capitalising on Hambantota’s strategic location. The port is located six nautical miles14 from the traditional east-west shipping route, where roughly 36,000 ships,15 use the route every year. The locational advantage means that this port is well connected to a broad maritime network. As such, this zone will attract industries that are looking to easily connect to their regional markets. Some of the services that would be offered16 include modern bonded warehousing, ship repairs and transhipment facilities. So far, they have already received 30 Expressions of Interest, from various firms to invest and set up in the zone. This zone has not only elevated the value of the port, but CM Ports have also put in place a complementary mechanism, that would ensure that port-services are utilised.
The China Merchants Group has businesses in various sectors17 including finance, property and transportation. CM Ports was also ranked 5th18 on Lloyds Top 10 World Port Operators in 2018, with a port network of 34 ports spanning across the globe from Houston, USA19 to Newcastle, Australia. Sri Lanka, in this case, can benefit from joining this transnational port network as it would allow Sri Lanka to expand its external linkages and improve connectivity. As shipping lines often use both direct-shipping and transhipments to improve global coverage,20 being part of a well establish port network would give Sri Lanka an advantage over some of its regional competitors.
As a result of these investments, Sri Lanka was also able to gain from technology and knowledge transfers. For instance, roll-on/roll-off (RORO) services which are commonly used to transport vehicles, require processes to be efficient to reduce cost.21 In 2018, the volume of RORO vessels handled at port increased by 136%.22 By March 2019, the port already reached 20% of total 2018 RORO throughput, signalling a strong positive outlook. CM Ports were able to improve efficiency by implementing best practices and processes. As a result, Hambantota Port was able to sign two Terminal Service Agreements early this year with major ship liners Hyundai Glovis and Hoegh Autoliner,23 both expected to bring in big volumes from European and Indian markets.
Thus, Chinese investment has helped Sri Lanka alleviate some of the capacity constraints that restricted growth. 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 that materialised, Sri Lanka stands a chance to expand its maritime network, improving port connectivity. Modern processes and new technologies that were adopted will also enable Sri Lanka to compete better with regional markets.
However, in order for Sri Lanka to ensure that these investments have a significant economic impact, certain domestic policies need to be implemented. 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, that is drafted in line with the Vision 202524 goals. By analysing and optimising the right modal mix, Sri Lanka can become more prudent on infrastructure expenditure, implement forward-looking policies and ensure that projects are chosen based on the right metrics.
In addition, more needs to be done to level the playing field between foreign and local investors to ensure equal returns and better balancing of risk and control. Through an open dialogue with China, Sri Lanka can encourage greater transparency, negotiate better loan terms and discuss backward linkages to further strengthen ties between the two countries.
Finally, Sri Lanka should also work towards ensuring political stability. The recent Easter Sunday Terror attacks25 was a major shock to the world. Ethnic clashes26 have also begun to unravel, disrupting and posing a threat to the lives of many. Better security mechanisms need to be implemented, including enforcing the rule of law. Failing to do so would derail the economy’s growth prospects and discourage further investment.
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 remains a major obstacle. By leveraging global initiatives such as the BRI to develop infrastructure and improve connectivity, Sri Lanka could stand to benefit. Chinese investments into these ports not only financed the necessary infrastructure but also provided technology and modern processes needed for Sri Lanka’s ports to compete in a competitive regional market. By providing diversified port-related services, improving connectivity and creating an environment that is attractive to new ship liners and businesses, Sri Lanka may be able to develop a stronger competitive edge. However, Sri Lanka needs a robust domestic policy framework to ensure these economic gains can be realised.
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*Pabasara Kannangara is a Research Associate at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI). The opinions expressed in this article are the author’s own and not the institutional views of LKI, and do not necessarily reflect the position of any other institution or individual with which the author is affiliated.