Preparing ports for next-generation ships

The shipping industry remains in the doldrums with a huge oversupply of tonnage and low freight rates. But Sri Lanka's massive port construction projects are proceeding, albeit with some delays, and they could perhaps be ready about the time the notoriously cyclical shipping industry turns around

By Echelon.

Published on April 20, 2013 with No Comments

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The port business seems to be lucrative going by the Rs4 billion profit Sri Lanka Ports Authority (SLPA) declared last year, up 600% from the year before. However, that’s also less than the annual US$36 million (Rs4.5 billion) SLPA gets in revenue from South Asia Gateway Terminals, a private sector rival in the Colombo Port. SAGT is an associate of the John Keells Holdings group, which along with its bunkering business, accounted for the biggest share of the conglomerate’s profits until the tourism revival.
In this interview, SLPA chairman Dr. Priyath Bandu Wickrama talks about its performance and other controversies over the massive ongoing billion-dollar port expansion projects. Wickrama became the SLPA’s youngest chairman in 2008 at the age of 35 and was just elected a vice president representing the Asian/Oceania region of the International Association of Ports and Harbours, the international organization for the world port industry. He not only manages Colombo, the island’s main trade gateway, along with other harbours, but also oversees the construction of two new ports, next to the existing one in Colombo and in Hambantota. Both projects aim to consolidate the island’s position as a cargo hub but have not been without controversy. In Colombo, the Aitken Spence group withdrew from a partnership with China Merchants Holdings International to build the first container terminal – known as the South Terminal – in the new Colombo South Harbour after construction cost estimates rose beyond what was considered commercially viable. The SLPA went ahead with the Chinese partner and also started work building its own terminal – the East Terminal – prompting the private sector to ask why a state agency should do it. Hambantota port was opened with much fanfare more than a year ago but still has no business, drawing criticism that it is a ‘white elephant’.

ports2The SLPA has declared impressive results for 2012, with net profit up 600% to Rs4.0 billion from the year before. Could you explain how this was achieved?
Our very good performance last year was a result of work begun earlier. We began streamlining all our activities, financial controls and other controls related to our expenditure and construction projects starting from 2009. As a result of this, every year we’ve been able to control our spending. Particularly, in the last four years we reduced the SLPA’s cadre by almost 4,000 employees to about 10,000 today from 14,000 – about 2,500 went through a voluntary retirement scheme and 1,500 through natural retirement. Our spending has remained flat, except for the main infrastructure development projects. We also introduced several measures to increase local (import-export) cargo volumes at our terminals. Previously, the share of volumes was about 50:50 between the two terminals, SLPA and South Asia Gateway Terminals. Now we have about 70% of local volumes, and we have 56% of overall port volumes, including transhipment. All this contributed to our highest-ever operating profit of over Rs12 billion. Even after the foreign exchange loss, we got Rs4.1 billion net profit.

What was the reason for the SLPA’s huge foreign exchange loss?
It was not only the yen loans the SLPA had taken (to build the Jaya Container Terminal). We have dollar loans as well. This is actually an accounting issue. We have dollar loans and we have dollar reserves. So we pay using dollar reserves. So for us there isn’t a forex loss. But from an accounting perspective – we had taken those loans when the US dollar was at about 112 – 113 rupees. Now it’s at 123 – 125. There’s a small depreciation cost. Now we’re trying to get permission from the Treasury to make our accounts in dollars. Then we will not have any exchange loss in future. At the moment all our accounts are in rupees, even though we collect payment in dollars. So the conversion has created some exchange loss in dollar loans as well. But our forex losses on the yen loans will continue because of the strengthening of the yen.

What is the contribution from SAGT to your top line and bottom line? Of the Rs4.1 billion profit, how much has SAGT contributed? (Note – The SLPA has a 16% stake in SAGT, an associate firm of John Keells Holdings, which has a 42% stake)
That I can’t say. We provide a lot of facilities to them and we don’t have separate accounts for SAGT expenditure and profit. The improvement in our performance is not because of the contribution from SAGT. We get about US$36 million a year on average from SAGT, not only from royalty on container throughput but from all dues. Actually, SAGT’s contribution to our revenue is very small compared with our total revenue. When I took over in 2009, port revenue was at Rs23.3 billion. We gradually increased it to Rs38.9 billion in 2012. So within four years our revenue almost doubled.

In percentage terms what is SAGT’s contribution?
I’m afraid I can’t say that. We don’t normally calculate it. We take it as our revenue. Because we provide all the tug services, we maintain the depths of their berths – so we have a cost as well. So we don’t have separate accounts to see the profit component we generate from SAGT. We take the revenue.

Has the SLPA’s profit increase come largely from SAGT’s contribution?
Not at all. If you take from 2009 to 2012, the contribution from SAGT is almost flat. Their revenue went down, their volume went down. On average, we have been getting US$33-36 million a year from SAGT for the last 3-4 years. This increase is not because of SAGT. For example, in 2011 our profit was Rs500 million with a $33-34 million revenue contribution from SAGT. This year we got the same revenue from SAGT but our profit is over Rs 4 billion. So it’s irrelevant to our profit. The $36 million revenue includes all revenue from all the services, lease rental, royalty, navigation, pilotage – all dues.

The East Terminal in the new South Harbour is being built by SLPA. How is it funded?
The project is on track. We had a little bit of an issue with the financing even though we had completed all the designs and filling work. The contractor resumed work in March and hopefully will complete the project around September 2013. There’s a delay – we had planned to complete this project in July this year but because of the issues we had with the finances it got delayed by two and a half months. We’re trying our best to catch up.
Earlier we had planned to get a loan from the Asian Development Bank but their decision-making process was a little too long. So now the Treasury has helped us get a loan from Bank of Ceylon. So now it’s local funding.
ports4At what rate? And what’s the repayment period?
The rate is around 5%. The repayment period is construction plus 10 years. There are two loans – one for infrastructure and the other for equipment. The infrastructure loan is around $50 million. The equipment loan will be around $75 million – it’s a $125 million project. Because actually our cost compared to the South Terminal (being built by China Merchants Holdings) is very low. This is because we took a lot of excess material dredged during the new port’s breakwater and harbour basin construction to use for reclamation for this, the East Terminal. Especially our planned container yard – it is our contractor’s working area. We planned it that way from the beginning – to give that area as the contractor’s working area. The contractor filled it and is using it. So we are getting it free of charge. And we filled part of the terminal as well using excess sand which we had (from dredging). Because of this we were able to reduce our cost a lot.

Why did the SLPA decide to build the East Terminal? Why not give it to private sector operators who are interested?
The SLPA needs to maintain its container terminal business. The present SLPA terminals cannot handle the bigger ships that are being deployed now. So if we don’t have a facility to handle these bigger ships, the SLPA terminal will eventually become a feeder terminal. Now, ships are getting bigger and bigger, especially on the Far East to Europe and USA trade routes. So it’s essential for us. We have done all the investments and we need to play a role as a transhipment terminal operator. To do that, we must have a terminal. This year, one berth 400 metres long will become operational.

What are the expected rates of return from your investment in the new East Terminal? What is the anticipated throughput?
It’s very positive. We have done studies on cargo volumes to be generated through this terminal and cash flows as well. We might have a little bit of an issue this year but after that our revenue will give enough profit for us to repay all the loans. The rate of return on our investment – it’s 100% owned by us – is about 12%. According to our forecast the East Terminal will get about 50,000 containers this year, 300,000 containers next year and around 1.2 million containers by 2018. According to the SLPA’s total revenue forecast, it rises from Rs 23 billion in 2009 to over Rs150 billion by 2020.ports graph

From where will the East Terminal’s cargo come – from existing lines or new business?
From both existing lines and new business. Anyway, all the lines are calling at Colombo. So what we’re trying to do is shift some of the ‘hubbing’ operations which take place in this part of the world to Sri Lanka. We have had several rounds of talks with shipping lines and they are willing to shift their volumes because of the facilities we offer them. These are not merely facilities we show on the drawing board – they actually are being built. If you compare port development in this part of the world, we are leading now. This port is the largest port in this region. Any ship can call at this port. This is the only port which can handle container carriers above 10,000 TEUs (twenty-foot equivalent container units). According to the ship order book, from 2012 to 2017, more than 150 ships each carrying over 10,000 TEUs will be delivered, and about 60-70% of that fleet will be deployed on the Far East-Europe and USA trade.

What is the status of the container terminal being built by China Merchants Holdings?
According to the agreement we have signed with them, they have to complete the terminal by the end of 2015. But now they are trying to complete by end of 2014 – one year ahead of schedule, as their contractor is doing a good job. Also, according to the agreement, they were planning to operate the first part of the terminal by end-2013. But now they’re going to do it by mid-2013. We’re happy with the progress they made in the last couple of months. If they can start early, it means we can get revenue early too. It will be good for the entire port.

Hambantota port was opened more than a year ago but still has no business. Why?
This is a brand new port. We had to develop the port infrastructure first. We had a lot of interest from investors but everybody was waiting until we developed the infrastructure. After that we had to get logistics facilities like cranes into the port. Colombo took more than 100 years to come up to this level. At the beginning we thought we need a minimum of three years to come up to a good operational level. Hambantota is now operational and so far has handled about 60 ships. Logistics and other issues took a long time to sort out.
Actually, we called the RFP (request for proposals) in 2010 to get investors, even before we filled water in the harbour basin. But it took two and a half years because of the other facilities required. Now it’s ready. We have now signed two agreements with private investors who will invest about $700 million. For the phase one of the port construction we invested only around $450 million. So these investments mean private investors have confidence in this port. We need some time to come up to a good operational level. For example, you can build a hotel, but you can’t fill that hotel in one month. You need some time. People must be made aware of the port and the facilities available.

But shipping lines have ignored Hambantota?
For shipping lines to call at a port, they need cargo. Hambantota is not a transhipment port – we’re going to generate cargo. For that we need investors to build factories and then shipping lines will definitely call there. For example, the agreement we signed with Peak Energy from Singapore, they alone are going to have more than 50,000 container moves a year. Ships will come to pick up those boxes. Peak Energy’s plant will be the largest single location PET manufacturing plant in the world. They are very big in India. They have signed an agreement with a US buyer to get 70% of their production. It was signed in Sri Lanka.

Why has there been such a long delay in starting bunkering operations at Hambantota?
In phase 1 of port construction, only one bunkering terminal was planned. But we later decided to build one more terminal. So we needed to change all our fire fighting, controls and pumping systems. That was done in phase 2 of construction, the loan for which we signed only recently. After that only the contractors started work. Now the facility is ready. By May everything will be ready. By the first week of April we’ll get the first parcel to do the trials. By end of May we’ll start proper bunkering. Getting the fuel will be up to the contractor.
It is the contractor’s responsibility to give the port under operational condition. They’ll bring the first sample. For the SLPA’s fuel supplies, we’re now negotiating through the government. We’re trying to get government-to-government facilities to get bunkers. Because the bunkering business needs a lot of flexibility. It’s very sensitive to world market conditions. We can’t have tenders to buy each and every parcel. We need long term relationships with suppliers who can share the risks with us. The government is helping us to find a source. We might be able to finalise it before May and get the products. We’re negotiating with a few oil majors in a few oil producing countries.

Was the bunkering business launch delayed because the SLPA’s marketing was inadequate?
No. We were waiting until we commissioned the facility. Actually, we’ve had a lot of discussions with all the shipping lines. They are willing to buy it from us if we can give a competitive price to them. And some of them are willing to include bunkering supplies even in our terminal services agreements. So we have no difficulty in selling. It’s only to start the bunkering. You can’t expect 100% use of the tank farm within one year. Gradually we will pick up the business. We already have a few customers willing to buy from us.

Wouldn’t it have started faster if you had given it to the private sector with the SLPA acting as the landlord and renting out the tanks?
No. If we put the lease rental and cost of investment into that, Sri Lankan bunker prices will not be competitive. We have eight bunker suppliers in Colombo of whom only four are active. But our prices are a little high. Initially, what we plan to do is, without making huge profits, to go with low profit and to expand the market and get that revenue into our revenue streams. We don’t have any intention to privatise bunkering. We have the capability. We are running the Colombo tank farm for the last three and a half years. We’re well-experienced in tank farm operations. We only need marketing capability. We are going to recruit a senior person from this industry to look after marketing.

What is the status of the cargo village at Peliyagoda? When will shippers actually be able to move cargo from there?
We had some problems with the soil condition and drainage system. We’re now finalising the soil improvement and drainage plans. After that we’ll start construction of warehouses. It should happen very soon, because we have taken enough time on this. By the end of this year we should be able to move cargo from there to the port.
We are getting our own rolling stock. We are planning to have four engines – two up and two down. We now have two engines, so we plan to buy two more. We also want to get about 60 carriages capable of carrying 40-foot containers. And we’re going to make them locally as well – there are two firms manufacturing trailers. These will be low-bed structures of a special design. We’re trying to make them in Sri Lanka and have almost finalised the design.

There has been some criticism about the project for a yacht building and repair facility in Galle as the SLPA did not call for tenders?
There was no need to. This was an unsolicited offer. We can accommodate unsolicited offers. The government has a mechanism to evaluate such unsolicited offers. We forwarded it to the Cabinet-appointed committee. They gave us the green-light to go ahead with the detailed evaluation and study. Another Cabinet-appointed committee looked at the proposal, evaluated it and approved it. Now the agreement is being studied by the Attorney-General’s Department. We never violated the procedure.

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