CASA offering perks to ministers to safeguard local shipping monopoly

The Ceylon Association of Shipping Agents better known as CASA it is learned is being controlled by the local shipping monopoly that consists of two conglomerates.

The two conglomerates are Hayleys Advantis and McLarens Group headed by Mohan Pandithage and Rohan de Silva. The Mohan-Rohan duo are well known in business as well as political circles as persons who use “wine, money and women” to get ahead in business.

The two conglomerates it is learnt are currently engaged in a massive campaign spending millions of rupees against the government's move to encourage global shipping and logistics lines from entering the country.

Issuing a circular number 73/2017 to its membership on November 13, 2017, CASA has drawn attention of its membership to the government’s 2018 budget proposal to “lift Ownership Restrictions in Shipping and Freight Forwarding.”

However, attention needs to be drawn to one sentence in the letter to the CASA membership.

“Immediate steps were taken to counter this proposal in the interests of our members and continuous lobbying at the highest level in government is on-going,” the letter states.

The circular was sent by CASA Secretary General, Ralph Anandappa and signed by Chairman of CASA, Ruwan Waidyaratne.

Interestingly, Waidyaratne is a member of several boards of directors of shipping lines under Hayleys Advantis.

Hence, Waidyaratne’s priority is to carry out the bidding of Mohan Pandithage and the latter’s bosom buddy, Rohan de Silva.

Looking at the letter, of particular interest are the words “continuous lobbying at the highest level in government is on-going,” which indicate that the Mohan-Rohan duo are once again at their well known game of ‘buying over’ individuals or institutions that would threaten their monopoly in the local shipping industry.

One could even speculate about the so called level of ‘lobbying’ given the recent incidents that had taken place in the country’s political sphere.

In the controversial Central Bank Treasury Bond scam, it has now been revealed that lobbying for support for the transaction resulted in powerful government ministers being provided with luxury penthouses in elite apartment complexes.

However, in this instance, only Shipping Minister Mahinda Samarasinghe has raised objections to the government’s 2018 budget proposal to liberalize the local shipping industry. He has in fact slammed the government proposal when the President, Prime Minister and Finance Minister along with other Cabinet ministers have expressed their desire to encourage global shipping lines to enter the country.

In effect, Samarasinghe it seems is now carrying out the bidding of the Mohan-Rohan duo.

One could therefore imagine the ‘level of lobbying’ carried out by the Mohan-Rohan duo to have Samarasinghe on their side.

 

casa

 

Note on the Liberalisation of Shipping Agency

A Shipping Agency is a company that represents the interests of a global shipping line in Sri Lanka (eg. COSCO is represented by Hayleys, Maersk by John Keells etc). Whenever a ship comes to Sri Lanka the shipping agent will;

  1. Represent the shipping line in dealings with the local authorities
  2. Liaise with the ports authority for berth booking, customs for clearance
  3. Ensure services such as bunkering, ship chandlers etc are made available

At present, the law states that a shipping or freight forwarding agency can have a maximum foreign ownership of 40%. Therefore shipping agency companies are all controlled by Sri Lankan companies and of the profit from ship agency 60% is with SL companies and 40% can be repatriated by the shipping line.

A key objective of this government is to ensure competition and contestation in markets. Shipping is a service to the export and import sector – more competition in the shipping industry will translate into lower cost, and higher quality services for Sri Lanka’s traders and consumers.

The shipping agency market faces limited competition because;

  1. Prices are controlled with minimum prices for agents determined by regulation.
  2. Foreign participation in the agency business is limited to 40% equity ownership.

This lack of competition translates into higher agency fees, which in turn translates into higher freight costs that are eventually borne by Sri Lankan exporters and importers. Allowing market determination of agency prices can help bring down shipping costs which will improve export competitiveness and help reduce the price of imports faced by consumers.

 

Key Arguments of the Shipping Agencies

  • Foreign Exchange Loss of US$ 800 mn

The shipping agencies quote a figure of US$ 800 million (Rs. 120 billion) as the country’s freight bill and that this will be repatriated in the event of 100% liberalization. This is not accurate. US$ 800 million is the approximate revenue – the profit of the shipping agent is around 5% commission of this which is around US$ 40 million (Rs. 6 billion), or a bit more than that accounting for any additional services. At present 60% of the US$ 40 mn (US$ 24 mn) by law is retained in the country with the local agent.  Therefore with 100% liberalisation what could be fully repatriated is around US$ 24 mn - not US$ 800 mn. At present this profit pool is shared by a handful of players as the major agencies are controlled by a few established companies – there is little justification for limiting competition to benefit the profits of a few companies.

In fact, if as expected the major shipping lines can attract more ships to call at Sri Lanka, it will expand the overall freight market and will increase the aggregate shipping and allied industries in Sri Lanka, expanding this $800mn significantly – creating more jobs, and new business opportunity.

 

  • Current Law does not prevent investment in hub activities

The primary argument of the shipping agencies is that the restriction on foreign ownership of the shipping agencies does not preclude any global shipping line from any investment in the broader maritime hub operations. The investment regime for other maritime hub activities such as warehousing, multi-country consolidation, ship ownership, etc. all allow 100% foreign investment as per the current law. The SL shipping agency contention is that the agency operation itself requires little or no investment and a full liberalization will just result in the foreign entity controlling the shipping agency company and repatriating profit without any material benefit to the economy.

At present 77% of Sri Lanka’s shipping activity is basic trans-shipment. In order to be a sustainable port it is necessary to move beyond trans-shipment to more value added third party logistics activities to attract non-trans-shipment vessels. To do so it is necessary to maximize the incentive for main line vessel operators to call at Sri Lanka. A shipping main line would have a greater incentive to direct more of its vessels to call at Colombo if it fully controls the agency business as well and has access to more than 40% of the profits from such business. Therefore whilst control of the shipping agency business may not be the primary deciding factor in setting up a HQ or hub operation, having only 40% equity in this would act as an important deterrent to such a decision by a shipping line.

  • SL Shipping Agents create jobs in the economy

It is also argued that shipping agencies provide a large number of jobs in the economy and that these could be lost if the sector is liberalized. This is also not entirely accurate. A liberalization would only entail a potential change in ownership from local to foreign – the employment of staff and operating activity will continue. A foreign operator may however seek higher efficiencies and therefore trim prevailing staff in some cases. If a shipping agency is at present running an efficient, lean operation, there would be no incentive for a new owner to trim down the work force. Any efficiency gains and cost reductions can be passed on to Sri Lanka’s import and export costs in a competitive market.

The shipping agencies also make a claim that foreign main line owners will convert Sri Lankan agency business into cost centres where no profit will be generated and therefore no tax will be paid.  However, appropriate transfer pricing laws can be brought in to ensure that this does not take place, as is done in other industries. This is why the establishment of an independent Port Regulator is also being mandated to address such concerns.  

  • Companies running shipping agencies have used the profits to invest heavily in other industries in Sri Lanka

Companies like Hayleys, Aitken Spence, Hemas, have used the profits from shipping agency business to re-invest back in Sri Lanka, whereas with liberalization the profits will be taken out of the country. Whilst this is factually correct, it could also be used as an argument to protect any industry to create high profits by inhibiting competition. In the same vein it could be argued that foreign investments should not be allowed in hotels because profits made from hotels can be used to invest in other sectors of the economy. But liberalization in sectors like hotels has expanded the size of the market and enabled groups like Shangri-La to attract their own brand market. The same theory applies to shipping and freight forwarding– there is a stronger incentive for shipping main lines to ensure their vessels call in Sri Lanka if they can keep majority share of the profits from all such activity.

  • The real bottleneck to expansion of shipping and hub activity is the lack of capacity and infrastructure.

The shipping agents argue that the delay in the Colombo West terminal is a major cause for bottlenecks in preventing more ships from calling into Sri Lanka. They also cite weakness in procedures, costs of transactions etc. as significant impediments. Whilst this is true, this alone is not an argument against allowing further foreign ownership of shipping agency. The improvements to port infrastructure and process must take place in parallel. The liberalization can still drive efficiency and cost reductions for Sri Lankan traders even without the immediate impact of more ships calling at the port.

 

  • Dubai Operates as a successful hub with 51% domestic ownership

Dubai is a completely different Middle Eastern model. It does not operate under a government mandated tariff and there is no regulation limiting profit sharing. What happens is a local individual can be a sponsor and that sponsor is shown in the paper work as 51%. However, he works on a fixed payment from the business operator. Eg. USD 100,000 for a year, and the working conditions are mutually agreed. This model is very well known, not only in Dubai, but in the Gulf, where "sleeping partners" operate and most are from the rulers’ families. This should not be a model for comparison – Singapore and Hong Kong are better comparisons.

  

Pricing of Freight Agency Charges   

A major anti-competitive structure in the shipping industry is the pricing structure of freight agency charges. Whilst these, like all other prices, ought to be determined by market rates, these charges were until recently determined by a Central Bank notification under the Exchange Control Act which prescribes minimum prices to be paid to shipping agents. It is understood that these prices are recommended by the shipping agency industry and now administered by DG Merchant Shipping Secretariat.

This is highly anti-competitive since these charges do not reflect efficiencies and market dynamics – regardless of efficiency or service quality the same price has to be paid to the agent. These charges are eventually passed on to the freight rates that are paid by Sri Lankan exporters and importers and affect Sri Lankan trade competitiveness.

Losing Opportunities

Competition is always met with the fear of the unknown. But what would have happened if we had not opened up the local telecom industry to competition in the mid-1990s? We would still be waiting in queues to receive a landline. The global investment in Sri Lanka’s telecom sector has ensured healthy competition, the best pricing, and best technology in the region. Healthy competition is good for the consumer, it is good for business. We will achieve the same in shipping, and will also create an independent regulator to ensure fair competition.  

Today thousands of ships pass by our ports – the longer we wait the more opportunities we miss. Instead of being satisfied with a mere morsel of the trade and shipping traffic received by the region, we will position Sri Lanka as a maritime hub, realising the full potential of our location and resources.

 

Country

Foreign Ownership Allowed %

Singapore

100

Hong Kong

100

Oman

100

India

100

Pakistan

100

Viet Nam

100

Indonesia

67

Regional HQs of Top Global Shipping Companies

Shipping line

ASEAN Regional HQ

Investment  regime

CMA CGM

Hong Kong

100% Foreign Ownership allowed

Maersk

Hong Kong

100% Foreign Ownership allowed

COSCO

Singapore

100% Foreign Ownership allowed

Hapag Llyod

Singapore

100% Foreign Ownership allowed

MSC

Singapore

100% Foreign Ownership allowed

 

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