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By Kapila Bandara 

Sri Lanka has granted sole and exclusive rights to the Chinese state enterprise China Merchants Port Holdings Company for a logistics centre in the Port of Colombo for 50 years.

The public-private venture on build, operate, and transfer (BOT) terms, involves Sri Lanka Ports Authority (SLPA), and civil engineers Access Engineering Plc as minority shareholders.

SLPA is not allowed under the BOT agreement, “to grant any third party the right to carry out port-related logistics or warehousing services at the Port of Colombo at a rate lower than the royalty fees payable by the project company”, filings by China Merchants Port show.

China Merchants Port has set up a fully-owned subsidiary, Fortune Centre Group Limited (FCGL) to build and run the ‘South Asia Commercial and Logistics Hub’. FCGL, a private limited liability company incorporated in the British Virgin Islands, gets the rights to name the chairman, managing director/chief executive officer, and appoint five directors, to the project company, ‘South Asia Commercial and Logistics Hub Limited’, while Access Engineering and SLPA can name one director each.

According to the shareholder agreement, FCGL will commit US$ 58.8 million cash to the Sri Lanka incorporated ‘South Asia Commercial and Logistics Hub Limited’, which will have an issued share capital of US$ 84m, China Merchants Port filings show.

China Merchants Port also owns 85% of the Colombo International Container Terminal (CICT) of the Port of Colombo. SLPA has a 15% interest in CICT. According to China Merchants Group’s annual filings for 2022, CICT handled 3.2 million containers. The group also notes a 10.44 million yuan (Rs 465m) dividend payable to SLPA.

The proposed at least five-story logistics centre will cost US$ 392 million (Rs 126.2 billion) and the cost includes the deposit, royalty fees and guarantee payable under the BOT agreement. Royalties are based on the minimum logistics throughput during the 50-year term. ‘South Asia Commercial and Logistics Hub Limited’ must pay SLPA a lump sum of US$14m in royalties no later than 90 days from the day when all conditions of the BOT agreement are met.

The cost considers the value of existing assets, the lease area and construction and development as well as expected revenue and other income the China Merchants Group may get from the logistics centre.

Also, US$ 126m must be deposited to a bank account in Sri Lanka within 60 days of the letter of intent, accepted by China Merchants Port on April 21, 2023.

‘South Asia Commercial and Logistics Hub Limited’ is required to give a US$ 4.5 million guarantee produced by a bank in Sri Lanka to SLPA once all conditions under the BOT agreement are met. “The guarantee ends on completion of all development-related obligations and shall be replaced with a demand letter of guarantee in the amount of US$ 7.5m which shall remain valid for the remaining term of the BOT agreement.”

At the end of 50 years, ‘South Asia Commercial and Logistics Hub Limited,’ “shall hand back” the leased site and transfer all assets of the logistics centre to SLPA”.

China Merchants Port says the logistics complex will allow it to gain a greater market share of South Asian ports and increase its influence in the region. A statement said it is “a giant leap forward’’.

Ports, Shipping, and Aviation Minister Nimal Siripala Silva said at the event announcing the venture, it was a “highly important turning point”.

The Minister said SLPA was providing the land and that rental (kuliya) was based on Government valuer’s estimate. He also said SLPA would receive about 15% of the logistic centre’s profit. But, such a term was not mentioned in the filings. The site agreement is to be signed. Not all conditions are disclosed.

FCGL signed the shareholders agreement with Access Engineering and SLPA, on April 21, 2023. FCGL will contribute US$ 58.8m cash (70% of the issued share capital of US$ 84m) to ‘South Asia Commercial and Logistics Hub Limited’, Access Engineering will contribute US$ 12.6m cash (15%), and SLPA will commit US$ 12.6m (15%).

Access Engineering, has among its top 20 shareholders, the Employees Provident Fund which holds 2.048%, while Sri Lanka Insurance Corporation Limited — Life Fund holds 0.361%.

The company is heavily involved in Government projects such as Kohuwala and Getambe flyovers funded by Hungary, the Kompanna Veediya (Slave Island) flyover, the 452-unit Bloemendhal housing project and the 1,000-unit Stadiumgama. It built the Mannar wind power project and Mirigama-Riloluwa part of the central expressway.

It is also building the East Container Terminal of the Port of Colombo with another Chinese state company, China Harbour Engineering Company. CHEC JV (Private) Limited is 51% owned by Access Engineering. China Harbour Engineering, a part of China Communications Construction Company owns the Port City Colombo real estate venture and Port of Hambantota.

SLPA’s 2021 annual report shows that it booked as net profit, lease rent of Rs. 12.91bn from 2016 to 2021, from South Asia Gateway Terminal, and Colombo International Container Terminal, and royalties of Rs. 19.58bn. In 2021, royalties from CICT were Rs 174.077m.

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BOX

Colombo trails in global trade logistics

By Kapila Bandara

Sri Lanka is nowhere near the top 10 high-calibre performers in world trade logistics services, although a parade of national leaders is continuing to peddle the myth of a global or even regional logistics hub, cargo hub, shipping hub and the like.

Trade logistics involves a chain of services to support goods movement, trade across geographical borders, and domestic commerce.

The world’s dominant logistics player is Singapore, which leads with a score of 4.3 (out of 5), a World Bank survey of 139 countries from September-November 2022 shows.

Among the top 12 players, 8 are in Europe — Finland, Denmark, the Netherlands, Switzerland, Austria, Belgium, Germany, and Sweden. Then there are Hong Kong, the United Arab Emirates, and Canada.

Sri Lanka scores just 2.8 in logistics performance; 2.5 for customs; 2.4 for infrastructure; 2.8 for international shipments; 2.7 for logistics shipments; 3.3 for timeliness; and 3 for tracking and tracing. Sri Lanka fares worse than Rwanda, Botswana, Peru, Namibia, Solomon Islands, and Benin in some aspects.

The average score of the top 10 is 4.1 on a 5-point scale. The bottom 10 averaged 1.8 overall.

The survey incorporates new key performance indicators — based on millions of global movements of containers, aviation shipments, and postal parcels — generated from a ‘Big Data’ approach, measuring the speed of global trade.

The survey analysed six aspects — customs and border management clearance efficiency; quality of trade-and-transport-related infrastructure; ease of arranging competitively priced international shipments; competence and quality of logistics services; ability to track and trace consignments; and frequency with which shipments reach consignees within the scheduled or expected delivery time. Strong overall performance is linked with good outcomes from all these aspects.

As for container port performance, in a separate survey of ports in West Asia, central, and South Asia, the King Abdallah Port ranks first in 2021. The Port of Colombo ranks 24, below Dammam and Djibouti, and ahead of Jawaharlal Nehru Port (54) and Chennai (79), and Karachi (90). Rankings are based on statistical and administrative approaches.

As a large port moving more than 4 million boxes a year, Colombo ranks 24. In terms of ship size (less than 1,500 containers) the port ranks 24, with 185 feeder ships. While Singapore ranks 31, it records 6,301 port calls versus Colombo’s 1,598 in 2021.

At the Port of Colombo, import and export delays are part of the problem. Corrupt politicians, officials and tycoons interfere to clear or rig duties of shipments such as in the milk powder import scam, sugar fraud, and rice scam, as well as 240-plus containers of putrid hospital and municipal waste found in 2019 in a ‘free trade zone’ in Katunayake and ‘CICT terminal’. Such practices are unheard of in Singapore or Hong Kong ports.

The shipping rate for a 40-foot container shot up to above US$ 10,000 in 2022, before sliding, the Drewry World Container Composite Index shows. As of April 20, 2023, the index shows the rate at US$ 1,773.58 (although higher from US$1,747 on March 23, 2023) compared with US$ 7,945 on April 21, 2022.

Container cargo still thrives thanks to American trucker Malcolm McLean who created the first container ship. His company Sea-Land still exists under the A.P. Moller Maersk Group.

Container carriers move more than half of the world’s trade measured by value.

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