Hambantota Port on the rise

Hambantota International Port, located on the south-eastern coast of Sri Lanka, is a relatively new destination on the world maritime map.  Although Hambantota has had maritime connections for centuries, its recent transformation from a modest fisheries harbour into a modern multipurpose deep-water facility has placed it foremost on the opportunity map for investment and development for Sri Lanka and the region.

Sri Lanka, or Ceylon as the country was known pre-independence, was already a popular trading post. Initially, the island was known for its gems and spices, but later became famous for cash crops such as tea, rubber and coconut.

More recently, Sri Lanka became a resource for skilled and semi-skilled workers, apparel manufacturing, software and one of the world’s desired tourist destinations. With the introduction of private port investors and operators in the late 1990s, the country’s maritime and logistics sector grew rapidly, with the Port of Colombo becoming the principle transshipment hub for South Asia.  Colombo Port is now a thriving and efficient transshipment destination, with a combination of Indian Subcontinent (ISC) transshipment and East-West relay cargo having grown in aggregate from 4m teu in 2008 to 7m teu in 2018.

With a record 15.6% growth in container handling during 2018,Colombo Port was ranked as the No. 1 container growth port among the world’s top 30 container ports by industry analyst, Alphaliner.

Colombo Port’s success provided the impetus for the Government of Sri Lanka (GOSL) and Sri Lanka Ports Authority (SLPA) to further develop this sector. With around 100 ships/day passing just kilometers from the sleepy fishing port of Hambantota, the GOSL embarked on a major pubic investment drive to develop the town and create a mega maritime location in the Indian Ocean, taking the initial step of converting Hambantota into a deepwater port in 2008.

The GOSL’s vision was to build a modern port, free of urban restrictions, with the capacity to evolve into an industrial and logistics zone in the long term, handling the growth in conventional cargo that Port of Colombo’s real estate limitations could not accommodate.

Hambantota Port thus presented opportunities that, in some ways, were quite different to the services Port of Colombo could offer, primarily due to having a vast expanse of land adjacent to the port, unlike Colombo, which is in the heart of a bustling city. The port’s location is ideal for it to be developed into a maritime related industrial and services hub.

Strategic geographic location

Hambantota Port is located at the very centre of a main international shipping route that connects the East and West. The port lies just 16 nautical miles from the main trade route of Asia and Europe, earning its name as the ‘gateway to South Asia’.

Rapid growth in economic development in emerging markets surrounding the Indian Ocean, such as the Bay of Bengal and East Africa, has created growth opportunities for Sri Lanka’s port industry, in addition to more established maritime business with India.

The deepwater terminal facility of Hambantota has the capacity to berth the largest of ships with ease and efficiency.

The land area dedicated for port-related industries adjacent to the port is approximately 3.5 square kilometers. An additional 50 square kilometers of land outside the port perimeter is allotted to an industrial zone. Investments by GOSL in utility infrastructure and highway connectivity to this area is already underway.

Ships travelling to Hambantota

From Shanghai, China          –   11 days

From Shenzhen, China         –   7-8 days

From Singapore                     –    03 days

From Dubai, UAE                  –    05 days

From Mombasa, Kenya         –    06 days

Durban, South Africa            –    09 days

Djibouti                                    –    11 days

 

Development opportunities

Hambantota has been declared a Free Port by GOSL which is currently involved in setting up export processing zones across the nation that will attract further business to the port. GOSL is drafting a Special Economic Zone (SEZ) Law, which will also apply to the Hambantota region. Two economic corridors are being created in the Colombo-Hambantota and Colombo-Kandy areas, opening vast areas of land that will become more accessible after completion, expected before the end of 2019, of the Southern expressway to Hambantota and the Colombo-Kandy expressway.

South Asian countries such as India and Bangladesh have rapidly industrialised in the past two decades due in part to advantages in population size, low cost workforces and land resources to drive development of manufacturing industries. However, their port facilities and infrastructure have been slow to develop adequate deepwater capability, leaving them with limited capacity to handle large ships. Port of Colombo is regarded as the container transshipment hub of choice at present.

Sri Lanka has bilateral preferential trade agreements with the EU (GSP+), India, Singapore and Pakistan, and Free Trade Agreements under negotiation with China, Bangladesh and Thailand. The country therefore has potential opportunities for trade cooperation with countries from the Bay of Bengal, the Middle East and East Africa.

Further opportunities stem from the fact that only 5% of the total trade by India, Pakistan, Bangladesh, Bhutan, Nepal and Maldives is intra-region trade, compared with ASEAN nations’ intra-trade share of 40%. Hambantota can therefore become a catalyst in fostering greater intra-region trade, both as a gateway to a dedicated SEZ as well as a logistical hub for cargo consolidation.

Hambantota Port under new management

In the latter part of 2017, SLPA signed an agreement with global port operator, Hong Kong-based China Merchant Port Holdings (CMPort) to convert Hambantota International Port into a Public Private Partnership (PPP). The PPP resulted in the formation of two local entities – Hambantota International Port Group Limited (HIPG) and Hambantota International Port services (HIPS). HIPG is primarily responsible for the development of the port, transforming it into a commercially viable national asset. HIPS has responsibility for the port’s common user services and ensuring port operations align with ISPS standards.

CMPort has invested $974m in the Hambantota International Port (HIP), acquiring an approximately 70% share in the port. HIP is currently held by HIPG on a 99-year lease term granted by GOSL to develop, manage and operate the port area.

Sri Lanka currently has around $7bnin PPPs operating successfully in port, telecommunications, power, housing and digital infrastructure sectors. Of these, the port and telecommunications PPPs of the late 1990s are still considered models for emulation in South Asia.

In 2012, Port of Colombo entered into its second PPP, when CMPort won a 35-year concession for the development of Colombo Port’s first deepwaterterminal, Colombo International Container Terminals (CICT). Today CICT handles more than 2.7m teu and has largely contributed towards enhancing Colombo Port’s hub status. CMPort’s proven success with CICT, coupled with its global track record, positioned it as the ideal partner for the next PPP — the HIP.

CMPort leading port operator

CMPort, a member of the China Merchants Group, is a blue chip listed on the Hong Kong Stock Exchange since 1992. The largest globally competitive public port developer, investor and operator in China, with investments in Mainland China, Hong Kong and overseas; CMPort began broadening its focus to global markets in 2008.  The company’s current portfolio spans a port network of 36 ports in 18 countries and regions.

Guided by the vision “to be a world class comprehensive port service provider” and supported by its domestic, overseas and innovation strategies, CMPort strives to strengthen its core competencies in global throughput, market share, port service businesses, management, resource efficiency and productivity, strongly establishing its global brand.

Sri Lanka Ports Authority

SLPA, constituted under the provisions of the Sri Lanka Ports Authority Act, No. 51 of 1979, is a unified organisation with a streamlined structure which does not receive financial allocations from the government, but operates on its own revenue and resources.Envisioning the future of Sri Lankan ports, the SLPA is shifting from its original objective of positioning Sri Lanka to be a global container hub, to that of becoming a global logistics hub. SLPA strategy is to be future-ready, to take advantage of opportunities and challenges that will open up with greater competition and growth in international trade.

Hambantota Port to emulate the Shekou model

On a macro level, HIPG has a strategic plan to develop Hambantota Port as a catalyst for the lateral growth of the Hambantota district.  The plan is based on a proven formula used by the parent company of its JV partner, China Merchants Group, to develop Shenzhen’s Shekou Free Trade Zone.

The “Shekou model”, which is also termed as a PPC concept (Port, Park, City), was used for the development of a port, an industrial park and subsequently a city. Once a small coastal fishing village, Shekou is now a metropolitan hub located at the southern tip of Shenzhen. Shekou was developed as China’s first port, open to foreign trade and run entirely by business enterprise.

Potential to become an energy hub

The most recent venture of HIPG was entering into an agreement to supply bunkering facilities to ships calling at the port, as well as vessels moving on the sea lanes. HIPG has already embarked on its ambitious plan to position the Hambantota Port as a source of IMO-compliant fuel for the region.

The foundation for this was laid by the recent award of a tender to a strategic bunkering partner of international repute. The tender process followed the evaluation of 23 internationally recognised players in the global bunker market, underlining the maritime community’s interest in the location. The awarding criteria was bespoke, taking account of the scale effect, price mechanism and future expansion plans of the prospective partner. Located between Singapore and Fujairah – the world’s number one and two bunker suppliers to the world respectively – Sri Lanka is well placed to exploit the potential of this trade, a completely new business vertical introduced by HIPG/CMPort.

HIPG will also cooperate with trade dealers to maximise economies of scale, thus contributing towards reducing commodity price. The bunkering business, which was one of SLPA’s key objectives, has now become a reality, with the CMPort partnership, as HIP will focus on establishing the operation during 4Q19. Hambantota will be the first port within the region to provide low-sulphur marine fuel, in compliance with the IMO 2020 rule, which will ideally position the port to take advantage of the increase in demand expected to take place in 2020.  Plans are already underway to expand HIP’s tank capacity in readiness for the upcoming change in the marine fuel markets.

HIP is also looking at bringing in refineries with the capability of building their own facilities which will make local production possible.  Apart from minimising HIP’s investment considerably, this will give the port a significant advantage, through being able to offer high grade fuel at a lower cost.

The management experience and expertise available to HIP from China Merchants Energy in Singapore will enable the port to provide a range of related maritime services not limited to bunkering.

Another area HIPG is focused on is further developing facilities for LPG handling, for which it intends partnering with local companies.  This would vastly benefit LPG users in the country whilst enabling the port to become a regional distributor of LPG. HIPG’s agreement to provide port facilities to Laugfs – a major player in Sri Lanka’s energy industry currently engaged in expanding its footprint overseas – is a step in this direction. The port has dedicated two jetties for oil, gas and petroleum business to facilitate energy companies like Laugfs, which plans on bringing LPG in larger vessels from international markets.

The Company isin the process of working with partners to provide LNG bunkering in the shortest possible time.

Other Services

HIP’s full range of services will include container handling, general cargo, ro-ro, passenger, bunkering, bulk terminal, gas and project cargo. The port is well on its way to becoming one of a kind in Sri Lanka, as it is the only port in the country designed to handle such a wide range of services in the maritime and logistics fields.

Another important recent development for HIP was the one stop service centre, established by the Board of Investment of Sri Lanka (BOI) at the port.The centre would provide facilitation services, including the granting of investment concessions to prospective investors.

HIPG will promote investment both locally and internationally to attract port related industries to Sri Lanka. The one stop service centre is the launch pad for the next stage in port development, when Sri Lanka would join the global value chain by further fostering international trade and commerce from the southern tip of Sri Lanka.

PRI Service Platform

A detailed business plan is in place for the development of the four square kilometer land space allotted to HIP for port related industries.  The marketing team of HIPG has been concentrating on industries such as the manufacture of building materials, consumables, automobiles, home appliances and fertiliser.  They will also investigate upstream and downstream industries in these areas.

HIPG has a three-phase strategy for developing this segment.  As a forerunner, it will look at developing value-added services aspects of the industrial park, giving priority to efficiency enhancements for industries locating with the park.  HIPG will lobby for preferential policies for the park via SEZ legislation while the first step towards this objective is already in place with the establishment of the one stop centre.  The company intends targeting businesses such as bonded warehousing, labeling and assembly during the first stage of the operation.

Once construction of basic facilities and other infrastructure are in place, the second stage of building standardised warehouses and attracting high value-added industries will begin, followed by upstream, middle and downstream industries in the final phase of the industrial park.  These may include food processing and automobile services, among others.

Conclusion

HIP’s distinctive geographically advantageous position alone cannot deliver. What will drive its success is the seamless partnership forged between CMPort, the SLPA and GOSL. The strengths each partner brings to this venture deliver considerable synergies to position the port as a vitally important multipurpose regional hub.

The partnership is also built on the principles of good governance and best practices covering social and environmental issues. Partners to this venture, CMPort and SLPA, have equal rights in approving all agreements entered into concerning the port and are bound to follow transparent tender procedures in securing the services of suppliers and service providers, in line with international procurement practices. The execution of proper authorisation lines, accounting practices and transparency is also strictly within CMPort’s corporate governance practices, and this will ensure that the interests of all shareholders are protected.

HIPG, together with HIPS, are in the process of developing the port stage by stage, driven by the needs of its customers. As the port and surrounding industrial park and real estate development area evolves, this will act as a stimulus for industrial, economic and social development in Hambantota and its adjacent areas.  It will also bring greater economic benefits to the government and people of Sri Lanka, while presenting unparalleled opportunities for local and foreign investors in taking advantage of opportunities in a region achieving among the fastest rates of economic growth of the world.

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