By D. Godage The Government is now finalising a deal to hand over the Hambantota Port on long term lease basis under Public-Private Partnership, though it appears to be a `sale`. Refraining from using the terms `privatisation’ or `sale’, the Hambantota Port is to be managed by a joint venture company formed between the Ports [...]

Sunday Times 2

Efficient operation of the Hambantota port


By D. Godage

The Government is now finalising a deal to hand over the Hambantota Port on long term lease basis under Public-Private Partnership, though it appears to be a `sale`. Refraining from using the terms `privatisation’ or `sale’, the Hambantota Port is to be managed by a joint venture company formed between the Ports Authority and China Merchant Port Holdings Company where a 20 % stake is held by the Ports Authority, as stated by the Government.

The Hambantota port is to be managed by a joint venture company.

Looking back in history in 1997, the Southern Development Authority called for Expressions of Interest on a multitude of projects under a proposed Ruhunupura development costing some US$ 3.4 billion which included an international seaport from private investment. The concept then was for a port projecting in to the ocean at the Hambantota bay. The primary argument has been the prime location on the traditional shipping route. The Canadian consultancy firm SNC-Lavalin was selected by the Board of Investment in 2000 and had obtained Cabinet approval. The Canadian Government had partly funded the cost of the study at no cost to our government. The feasibility study was the initial part of the Build Operate Transfer (BOT) process to be undertaken by the investor.

SNC-Lavalin’s 2003 report had concluded that the project is viable as a container port on a BOT basis under a PPP approach. Conclusions spelt three phased development totaling 11 berths with 10 million TEU ultimate capacity reaching in 20 years at ultimate cost US$ 1.48 billion. Stage 1 was scheduled to be operational in early 2009. Incidentally the construction contract with Chinese loan funds had in fact been signed in 2007 and construction started in 2007. The report expected the Colombo Port’s total capacity to be 3.4 million TEUs which means no further expansion. So this assumption appears not true. Later the Steering Committee appointed by the Ports Authority had concluded this report to be non-bankable.

Meanwhile the Ministry of Ports Development and Development of the South with the Ports Authority had called for tenders in 2001 and selected the international consultancy firm Ramboll, of Denmark, to carry out a feasibility study for the Hambantota Port development and the cost was to be borne by the Ports Authority. This report seems to have come out in 2006 but was not seen by the writer. The layout plans used in the construction appear similar to those presented by Ramboll.

The proposed Hambantota Port was brought under the Ports Authority under the SLPA Act by Gazette notification on 8 November 2001. The project office was opened in November 2001 by the Minister of Ports, Shipping and Fisheries Mahinda Rajapaksa. Some were keen to carry the Hambantota project as an urgent one and even critical in Colombo South Port development. As stated, construction on the Hambantota Port commenced in 2007 while the Colombo South Harbour construction started in 2008 using an Asian Development Bank loan after completing a feasibility study and business plan with the bank’s assistance. Now both ports are operational and everyone can see the success of the South Container Terminal on a BOT basis and the competition created for the next terminal namely the East Terminal in Colombo.

Lately some opposition politicians have started talking about the Kra Canal in support of Hambantota. No shipper, consultant or expert had talked about the Kra Canal in any of the studies on Hambantota or Colombo. What is the Kra Canal? It is a canal to cut across the narrow strip of Southern Thailand some 100 km long to by-pass Malacca Straits to shorten voyages by 1,200 km for China entering the Indian Ocean. The canal is said to cost over US$ 28 billion, taking about 10 years to construct. It had been proposed initially a long time ago, in 1677 it is said. This canal will affect Singapore and Malaysia but will benefit Sri Lanka with bigger volumes both in Colombo and Hambantota. Like Sethusamudram Canal it is talked of once in a while.

Now if we look at Hambantota Port the port operations started in November 2010 and after six years, in 2016, an operating profit of US$1.81 million is reported which is far too short to proceed with loan repayment. The Government therefore has no option other than handing it over to a reputed port operator to ensure income to the Government to at least meet the loan component.

Available information shows the total cost of two phases of the Port as US$ 1.4 billion and the selected investor is paying US$ 1.12 billion in advance covering an 80% stake. The lease period is given as 99 years extendable by another 99 years. The whole port facility has 10 or 11 berths and about 2,500 hectares of land attached to the port. It is not clear if the oil tank facility is also included. The upfront lease payment works out to US$ 11.3 million per year for 99 years on a current value basis and is quite inadequate for such a massive completed port asset. Any other revenue streams to the Government or Ports Authority are not known. The lease period of less than 50 years would have been acceptable and any extension is to be considered at that time and decided amicably.

Previously two container terminals in Colombo were given out on a BOT basis for a 35 year lease period and in both the private investors built the terminals and equipped them with their own funds. The South Asia Gateway Terminal has been operational for over 15 years and South Container Terminal in South Harbour under CICT has also been operating successfully. CICT had reached two million TEUs in 2016 in the second year of operation, incidentally equal to the designed capacity of Hambantota Phase 1. The Ports Authority earns an annual lease payment, royalty fee on every container handled, port entry dues, wharfage charge, dividends on a 15% share etc, from them. Whereas revenue streams in respect of the Hambantota Port are not known to the public.

Some point out that there was no bidding for the Hambantota Port. It is a transparent process but not mandatory. When offers were called in 1996 for the Colombo Port QEQ lease there was only one offer and that too was an alternative offer. The Colombo South Container Terminal lease invitation in 2007 brought in five offers but a Cabinet decision in 2008 cancelled it. The call for fresh bids brought in only one offer. Bid calling for Hambantota may not have yielded a better result. Questions that prevail are on the terms and conditions applicable to the deal.

Considering the huge debt burden of over US$ 1.1 billion on this port alone, some drastic measures need to be taken to escape from the present situation. Of course the Government must explain relevant information and educate the public so that everything remains transparent on this national issue tying down future generations without their consent.

(The writer was the Chief Engineer at the port, Managing Director of the Sri Lanka Ports Authority and a Project Director at the Colombo South Harbour.)

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