The government is planning to issue a Letter of Intent, by the end of July, to China Merchants Holdings International, the Hong Kong-based, partially Chinese-government owned company, for the Colombo South Harbour terminal construction.
“A Chinese team is due to arrive this week and we hope to issue a Letter of Intent, by the end of July, to give clearance to proceed with the formalities¸ Chairman of the Sri Lanka Ports Authority (SLPA), Dr. Priyath Bandu Wickrama, told the Business Times this week in the sidelines of the AGM of the Sri Lanka Shippers' Council.
The SLPA says the harbour construction work is on track and that the harbour should be operational by end-April 2012. Construction work on the terminal is due to start early next year. “They have to start construction work six months after the Letter of Intent is issued,” said Dr Wickrama.
The Colombo South Harbour terminal construction is a shareholding between the SLPA, China Merchants Holdings International and local blue chip company, Aitken Spence. The terminal is expected to cost around US$ 450 million to build, and will be managed by majority shareholder China Merchants Holdings International.
The Colombo Port itself is expected to reach full capacity by mid next year. To keep servicing the growing demand, until the South Harbour terminal adds more capacity to Colombo, the SLPA says it is investing another US$ 150 million to expand capacity at the existing Colombo Port.
“The Colombo port will reach full capacity by mid-2011. So we are investing US$ 150 million to buy more cranes and container handling equipment, and to convert three berths to handle containers and to expand yard capacity. These measures will improve productivity and will increase yard capacity, so that the gap up to April 2012 will be filled, until the Colombo South Harbour is available,” said Dr Wickrama.
The first phase of the Hambantota Port is also expected to be finished in November this year. However, Hambantota is to be an industrial port and will not be immediately available for commercial container handling. The SLPA says commercial container handling facilities may be introduced later, depending on demand.
South Harbour to cut costs
Local shippers say the Colombo South port will help reduce import and export costs for Sri Lanka. Already the Colombo Port is running at near capacity and the number of vessels visiting Colombo is limited. Shippers say the South Harbour will allow more ships to visit Colombo and will help drive down freight rates through increased competition.
“With the Colombo South Harbour, more capacity will come in. So this will reduce import, export costs by reducing freight rates,” said the Chairman of the Sri Lanka Shippers' Council, Gehan Kuruppu.
Exporters too, say increased port capacity will help reduce export costs.
“This year freight rates increased from around 20% to 50% compared to last year. But if we have more ports, more shipping lines will come to Sri Lanka. This will help reduce the rates,” said Director Operations and Logistics at Tea Tang, Jayanath Perera.
Shippers say the shipping lines have increased freight rates by artificially holding down the supply of ship space – to make up for losses during the recession.
“During the economic slowdown exports and trade reduced. So shipping lines and carriers had to reduce their rates. Now, demand for ship space is picking up, as countries are coming out of recession. But the shipping lines held down the ship space. So the rates went up,” said Mr Kuruppu.
Shippers say the rates may continue to increase this year making imports and exports more costly for Sri Lanka, although the war risk insurance premium is no longer applied to Sri Lanka. Exports, such as tea, rubber and apparel, account for the major portion of export volumes out of Sri Lanka.
However, apparel exports are generally on FOB terms and local garment manufacturers get squeezed when freight rates increase at both import and export ends. “The peak export season starts in July, which means the demand for ship space will increase and the shipping lines are lobbying for another freight increase that they are calling a General Rate Increase. So this is a matter of concern,” said Mr Kuruppu.
Shippers are also still calling for the Electronic Data Interchange (EDI) system to enable faster cargo clearing.