Trade liberalization cycle Opening up the logistics and shipping sectors

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By 2017-11-22

By Paneetha Ameresekere

With reference to the second generation of liberalization of the economy planned, the Premier said, this was a move to attract foreign investments into the country. "The days of crony capitalism for the private sector is over."

"The masses need a better life and employment and we have to face a poll in another five years.

"Those priorities will be the guiding light of the present Unity Government.

"We need to be a social market economy to attract FDI.

"Deal makings by hobnobbing with the echelons of power in government to meet the parochial needs of certain players in the private sector will be a thing of the past. Therefore, the private sector will have to pull up its socks if it wishes to compete with global players in the local market."

Premier Ranil Wickremesinghe speaking at the country's inaugural Human Capital Development Summit which took place in Colombo on 11 August 2016. (Ceylon Today, 13 August 2016)

"Budget 2018 was a further step to liberalize the economy to enhance the country's competitiveness on the global stage. There will be winners and losers in this endeavour, but the losers will be given a helping hand."

State Finance Minister Eran Wickramaratne speaking at a KPMG hosted post-budget seminar held in Colombo on 10 November 2017. (Ceylon Today, 11 November 2017)

Finance Minister Mangala Samaraweera in his 9 November Budget speech, in line with Premier Ranil Wickremesinghe's vision of moving the country into the second generation of liberalization, also removed a distortion in Sri Lanka's shipping and logistics laws.

Samaraweera, by doing away with foreign ownership restrictions on shipping agencies and logistics/freight forward companies in his maiden Budget speech, where previously foreign ownership was restricted to a maximum of 40 per cent, has put to rest an ambiguity in Sri Lanka's legislation pertaining to shipping agencies and freight forwarding/logistics companies.

Maersk

Whereas Denmark based Maersk, the world's largest container ship operator, is allowed to run an office in Colombo which is 100 per cent owned by them, other foreign container ship operators are restricted, by having their maximum ownership rights restricted to 40 per cent in shipping companies/agencies. They are not permitted to open country offices unlike Maersk.

Maersk's Colombo operation is also not a Board of Investment company. It, 'paradoxically' began operations in Sri Lanka a few months after the July 1983 riots, i.e. in December 1983 as a joint venture with the State-owned Ceylon Shipping Corporation before parting ways. Another distortion in Sri Lanka's discriminatory foreign ownership laws is that prior to Budget 2018, presented by Samaraweera in Parliament on 9 November, foreign ownership in logistics/freight forwarding companies, like in shipping companies/agencies, were also restricted to 40 per cent.

But during the Rajapaksa era, a Japanese company bought a controlling stake in a local freight forwarding company, despite the fact that according to the law, a foreign company can hold only up to a maximum of 40 per cent in a local logistics/freight forwarding company.

That local company in which this Japanese logistics company bought a majority stake was Expolanka and this deal was done in mid 2014, the last year of the Rajapaksa era.

DHL

Another distortion in Sri Lanka's freight forwarding/logistics laws is in respect of 'DHL-Keells.' DHL is a global logistics company, while Keells is one of Sri Lanka's premier diversified blue chip companies. Though there is a restriction in foreign ownership up to a maximum of 40 per cent in a freight forwarding company, 'DHL-Keells' operates on the basis of a '50-50' ownership.

DHL entered Sri Lanka three years after the island opened up its economy in 1980. Samaraweera's Budget proposals vis-à-vis shipping and logistics, apart from the liberalization of these two sectors of the economy, they may also have had been done to arrest the aforesaid distortions and ambiguities in Sri Lanka's investment regime, where the law says one thing, but the practice is another.

International trade, apart from the tailwinds provided by an open economy, runs on three wheels. They are logistics, shipping, and ports. Sri Lanka has liberalized ports, beginning with the Mahinda Rajapaksa regime handing over the South Port of the Colombo Harbour to the Chinese (China Merchants/CICT) in 2013. What remained were the logistics and shipping sectors.

If 'Budget 2018' vis-à-vis these sectors are implemented, then the trade cycle is completed. That will also give a boost to multinational companies such as Maersk and DHL which are already on board here to expand their operations, without the fear of Sri Lanka's ambiguous shipping and logistics laws, hanging perilously over their heads, like the proverbial 'Sword of Damocles, hanging by a thread.'

Global economy

The global economy, not least trade, operates on a competitive plane, 'where the winner takes them all, the loser standing small,' which in effect is what Wickramaratne implied, when speaking at the KPMG Budget Seminar where he stated "Budget 2018 was a further step to liberalize the economy to enhance the country's competitiveness on the global stage. There will be winners and losers in this endeavour, but the losers will be given a helping hand."

Nonetheless, liberalization has paid dividends to Sri Lanka. Prior to 1977, i.e. in the pre-liberalization era, Sri Lanka's unemployment rate was in the double digit range, having in operation inefficient, local industries.

Post liberalization, Sri Lanka's unemployment rate is under five per cent, despite the closure of inefficient industries and the spawning of new, not necessarily foreign led, but by some existing companies in the pre 1977 era, modernising their operations to suit with the times, while at the same time spawning new, local industries.

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