Situated close to some of the world’s most important sea lanes, connecting the Asian, African and European continents, Sri Lanka has some major strategic advantages when it comes to global transport links.
At the same time, this island of nearly 21m people lies just off the coast of one of the world’s largest and fastest-developing economies – India – while enjoying excellent relations with another global leader, China. Both have helped give Sri Lanka a strong foundation on which to further develop its transport and logistics infrastructure, with the goal of becoming an international hub for those countries now firmly in view.
In addition, the island has been experiencing strong, recent economic growth as it emerges from decades of civil conflict. Domestic infrastructure is thus improving at a rapid pace, although it still requires some major investment in road, rail, sea and air. Spreading growth and prosperity from the main population and industrial concentration of the Western Province requires a major rollout of hard infrastructure in some challenging terrain, which will create more opportunities for sector outfits, particularly now that the current government is keen to open the country up still further to private investors, both foreign and domestic.
The key government body for the sector is the Ministry of Transport and Civil Aviation (MTCA), which oversees a number of other important institutions, including Sri Lanka Railways (SLR), the National Transport Commission, the Sri Lanka Transport Board (SLTB), the Civil Aviation Authority (CAA) and the Department of Motor Traffic, among others.
A second important government outfit is the Ministry of Higher Education and Highways, which sets the policy direction for the Road Development Authority (RDA). The RDA is in turn responsible for the country’s national highway network, which consists of the country’s expressways, A- and B-class roads, and bridges. In 1989 responsibility for mainly local and rural C- D- and E-class roads was handed over to provincial councils.
The country’s ports come under the purview of the Ministry of Ports and Shipping; a key institution under its umbrella is the Sri Lanka Ports Authority (SLPA). Set up in 1979, the state-owned SLPA no longer receives government allocations. The Ceylon Shipping Corporation, meanwhile, also a state-run firm, operates a fleet of merchant vessels for the country.
Responsibility for the smooth running of the country’s airports falls to the Airport and Aviation Services Sri Lanka (AASSL), which is also overseen by the MTCA. The AASSL operates Bandaranaike International Airport (BIA) – Colombo’s main international terminal – and Mattala Rajapaksa International Airport (MRIA) at Hambantota. Its responsibilities also extend to Ratmalana Airport, a smaller terminal south of the capital.
Sri Lanka’s national air carrier is SriLankan Airlines (SLA), which is majority-owned by the government. The airline also had a low-cost carrier companion, known as Mihin Lanka, but this was wound up at the end of October 2016, with SLA taking over all the airline’s routes. SLA is now the only Sri Lankan-owned international carrier, though there are a handful of small domestic route-only outfits. These include Air Senok, Cinnamon Air, Millennium Airlines and Helitours. These companies operate small turboprop planes and/or helicopters.
According to figures from the Central Bank of Sri Lanka (CBSL), the transport sector accounted for 11.6% of the country’s total GDP in 2015, generating LKR1.3trn ($8.1bn), up 1.6% from the year before. The figure includes transport of both goods and passengers, and warehousing.
The most recent statistics from the Asian Development Bank indicate that in 2012 road was by far the dominant mode of transport in Sri Lanka, accounting for around 97% of total freight traffic and 93% of the total demand for passenger travel in that year, which was estimated to be 80bn passenger km (pkm). Provisional CBSL statistics for 2015 paint a similar picture: while SLR accounted for 7.4bn pkm and SLA for 12.7bn, regional state buses alone accounted for 15.2bn passengers pkm and private sector buses for 31.7bn. Factoring in the 4.44m vehicles on the roads in 2015, an increase over 3.74m in 2014, the lion’s share of the sector clearly lies with the road network.
When it comes to the maritime sector, most cargo going through the island’s main ports is for trans-shipment. The Port of Colombo, which accounted for 4197 of the 4728 vessels that arrived in Sri Lanka in 2015, saw only 1.2m twenty-foot equivalent units (TEUs) in domestic imports and exports out of a total of 5.2m TEUs, meaning that around 80% of all containers arriving were then trans-shipped elsewhere.
Thus, Sri Lanka can be characterised as a country with strong international maritime links and a road-dependent domestic transport network. Domestic air travel remains underdeveloped, despite the often lengthy journey times between the island’s main urban centres. This picture is not likely to change substantially over the next several years, although there are a number of major improvements in the pipeline.
Take The Plane
The key air hub for the country is BIA, located outside Negombo, some 35 km north of the capital. BIA, which was first opened in 1967, took on its present name in 1970. Today, the airport, which is used partly for military and partly for civilian purposes, is the premier arrivals spot for all international passengers, accounting for 98.6% of arrivals in the country in 2015, according to the Sri Lanka Tourism Development Authority. The airport is undergoing a major, long-term expansion and redevelopment programme, under which it has now reached the second stage of the second phase. The $500m phase was put out for tendering in spring 2016, with an expected award of construction contracts in 2017, and a 2020 completion date. It includes a new multi-level, two-pier Terminal 2 building, with some 180,000 sq metres of floor area, and vertical separation of arrivals and departures. Some 23 aircraft parking stands, taxiways, check-in counters, boarding gates and passenger bridges are among the new additions. Financing for this phase is being facilitated by a concessionary loan between the Japanese International Cooperation Agency (JICA) and the AASSL, signed in March 2016. The design emphasises eco-friendly processes, with rainwater harvesting, photovoltaic power generation and energy efficient materials being used in construction. The current phase also involves an improvement project of approximately $50m for the airport’s runways and taxiways, with the first resurfacing since 1986 completed in April 2017. This project proved controversial, as it involved closing the main runway for up to eight hours in the daytime. It also meant considerable disruption for SLA, with over 600 flights being cancelled during the runway closure period. The cost could approach $50m, though an exact reconciliation is an almost impossible task due the complexities of the airlines’ regional hub and spoke network. The runway project is being carried out by China National Aero Technology International Group and a unit of the Chinese civil aviation authority. When completed, the upgraded airport will be able to handle an additional 9m passengers per annum, bringing the total to 15m, significantly relieving current congestion; BIA has been under pressure in terms of capacity for some time, with the current terminal built for just 6m passengers per year. The new runway will allow up to 35 flights per hour, instead of the current 25.
The AASSL is also responsible for the country’s newest international airport, MRIA, located near Mattala, a town some 18 km from the southern port and free zone complex of Magampura Mahinda Rajapaksa Port (MMRP) in Hambantota. MRIA was opened in 2013 by former President Mahinda Rajapaksa, a native of the area. It has a 12,000-sq-metre terminal building, 12 check-in counters, two gates, a runway length of 3500 metres and a capacity of 1m passengers per year. The airport cost $290m, with $190m provided by a loan from the Export-Import Bank of China (China EximBank). At the time, China was also helping to finance the nearby, deepwater MMRP, as well as an associated industrial zone and new city. The air link was therefore seen as a vital part of this development project.
The success of MRIA has so far been very limited, as it has yet to attract more than a handful of flights per day. The nearby port has also had a limited impact. Data from SLTB shows 0.1% of total arrivals in 2013 came in at MRIA, with this falling to a statistical zero in 2015. In late 2016 the new government of President Maithripala Sirisena was reportedly looking to arrange a public-private partnership (PPP) for the airport, along with the proposed Hambantota Investment Zone, an adjacent free trade zone that, if developed, could create synergies with MRIA and the nearby deepwater port.
Dotted around the island are a number of other smaller airstrips and landing places. Many of these are the result of the recent conflict and were built by the military, while others date back to the First World War. The government is keen to employ these in the development of the domestic sector and is even considering using dual-use military transports.
In late 2016 news came that Sri Lanka intended to buy two Chinese Xian Y-20 heavy lift transport planes for both military and civilian purposes. In the latter case, the planes would allow them to carry 66 tonnes up to 4500 km to transport civilian passengers around the island. In addition, the Sri Lankan military might be invited to set up a domestic airline to transport travellers. Indeed, the military has long been a strong competitor for civil airlines on many domestic routes. In July 2016 Batticaloa’s former military airport on the east coast was opened by Sirisena, with a rebuilt, 1500-metre runway and a new passenger terminal. Ratmalana continues to be the hub for the small, largely air taxi services that constitute the domestic sector.
SLA, meanwhile, is undergoing substantial restructuring. The airline has had a chequered history in recent years, particularly since its 10-year management agreement with Emirates Airline was ended in 2008. Emirates’ 44% stake was bought out by the state-owned Bank of Ceylon in 2010. The Sri Lankan national carrier then began accumulating large debts, reported to be around $1bn in late 2016, in addition to accumulated losses of around $872m. The present government is working to find a solution for this issue, and in March 2016 called for international expression of interests (EOIs) from companies for a 49% stake in the airline and management control. The audit and tax services firm KPMG and the Sri Lanka National Savings Bank were appointed to run the process, yet as of April 2017 there was no agreement after three EOIs were floated; at this time Emirates Airlines were considering new talks as SLA’s debt burden deepens.
SLA continues to attract potential partners. Sri Lanka is a rapidly growing tourist destination (see Tourism chapter), while the airline has an all-Airbus fleet of 24 planes, 13 of which are Airbus A330s. It also has a portfolio of 96 destinations in 46 countries, with profitable Indian routes among them. However, a rationalisation of these routes has begun, as the airline focuses on building up its presence in China. “We have slashed long-haul routes to Europe with the exception of London,” Ajith Dias, chairman of SLA, told OBG. “In the past six years we have lost €150 per person on those routes. Instead we have entered into a code-sharing agreement with Etihad Airways and Qatar Airways.”
SLA’s engineering division has had a remarkable year. A long-standing relationship with Indigo Airlines has seen over 400 heavy maintenance checks been carried out by a dedicated ‘line’ at Katunayake. Space constraints prevent this business from expanding, but the airline is planning to spin off the EASA-certified Maintenance and Repair Organisation this year, in conjunction with plans to build a new hangar complex adjacent to the existing 747 hangar which is over thirty years old. A third parallel company, Aircraft Heavy Maintenance Line, at BIA, was commissioned in 2016, with the division kept busy by orders from Indian carrier IndiGo in particular. There have also been some successful overseas expansions of the engineering business, at cities such as Male, Chennai, Lahore and Karachi, with Dhaka coming on-line in 2017. SriLankan Engineering is thus placing BIA in a good position to become a regional maintenance, repair and overhaul hub. SLA also owns SriLankan Aviation College, a five-faculty campus, which is also expanding from its Colombo base to other cities around the island, such as Jaffna and Galle. The college gained global recognition in 2015 when it was granted associate membership of the International Civil Aviation Organisation’s TRAINAIR PLUS programme. The college already has recognition from the International Air Travel Association and European Aviation Safety Agency.
The airline’s future likely depends on the extent to which its debts might be taken on by the government, leaving any new management and equity owner to concentrate on leveraging SLA’s more positive capital. In February 2017 the government announced it was seeking higher bids from interested parties, after the offers it received fell below expectations. In spite of this delay, there is hope that 2017 will see the airline under new management and back on the road to profitability.
Sri Lanka’s maritime sector is gearing up for a major leap forward in its strategy. The island nation has long been able to leverage its strategic position in the Indian Ocean to establish itself as a key stop on east-to-west trading routes.
In British colonial times, its significance escalated significantly. It became a vital crossroads for maritime traffic between Africa, Europe and Asia. At the same time, due to its location at the southern end of the Bay of Bengal, Sri Lanka is uniquely placed to draw in traffic from the eastern Indian ports, Bangladesh, Myanmar and the Asian hinterlands beyond.
Colombo is currently already home to some of the oldest international shipping companies in Asia and has maintained its competitive edge in the region, despite the conflict of recent years. Indeed, Zeeshan Mukhi, country manager of the shipping company Maersk, told OBG, “Sri Lanka’s port network becomes all the more impressive if we consider that it was relatively isolated during the war.” It is this tradition that Sri Lanka is now looking to capitalise on to become the key shipping hub between Dubai to the west and Singapore, to the east.
The SLPA’s plan for achieving this hinges on a four-port strategy, based on the ports of Colombo, Galle, Hambantota and Trincomalee. Each of these will play a distinct role in the sector’s development over the next decade. The Port of Colombo, the nation’s largest and busiest, currently focuses mainly on trans-shipment, as well as handling the bulk of Sri Lanka’s domestic imports and exports. Much of the trans-shipment trade is connected to India, which lacks deepwater harbours on its eastern seaboard. Some 71% of all the trans-shipment activity in the Port of Colombo is currently India-bound traffic. Indeed, Colombo continues to outpace the other South Asian ports in terms of throughput. In 2015 it handled 5.18m TEUs, up 5.7% on 2014, well ahead of its main regional rival, India’s Jawaharlal Nehru Port, which handled 4.48m TEUs in 2015, up just 0.2% on 2014. Other regional peers include Chittagong in Bangladesh, which handled 2m TEUs in 2015, and Karachi in Pakistan, which handled 1.8m TEUs that year. Erwin Haaze, CEO of South Asia Gateway Terminals (SAGT), told OBG, “As Myanmar and Bangladesh continue to grow, they will become more reliant on Sri Lanka as a trans-shipment centre.”
These large volumes are the result of a long-term expansion programme that began in 2008 with the SLPA commissioning Hyundai Engineering and Construction Company to deepen and widen the port’s facilities. The harbour is now served by a two-way channel 20 metres deep and 570 metres wide.
In addition, the expansion programme included the construction of additional terminals. The port now offers the Jaye Container Terminal (JCT), with a dredged depth of 12-15 metres, and cranes capable of handling Panamax and Super Post-Panamax vessels; the Unity Container Terminal, a two-berth facility with a 8000-TEU stacking capacity; the terminal operated by SAGT, which is also capable of handling the largest vessels from its three 15-metre berths; and the Colombo International Container Terminal (CICT), with four berths 18 metres in depth and a design capacity for handling 2.4m TEUs using its 70-metre outreach cranes.
Managing container shipping in the Port of Colombo is a fine balance. As the number of vessel calls continues to rise, this negatively impacts berth utilisation as the “downtime” between vessels accumulates. An analysis of the average load and discharge volumes of vessels between the terminals suggests that although the very large vessels are arriving in greater numbers, the exchange remains disproportionate to the size of vessels. The SLPA continues to develop ancillary services in line with this increase, and ideas for a separation of SLPA and the JCT structure have been floated. Moreover, although the number of large vessels arriving continues to grow, the actual number of vessels requiring more than a 14-metre draft is only about 30% of all vessels calling at the only deep-draft facility.
A further terminal is also in the pipeline. The $550m-600m East Container Terminal (ECT) will be another deepwater facility, with a 1200-metre linear quay wall holding three 400-metre berths with 18-metre draughts. The minimum throughput capacity will be 2.4m TEUs. The ECT will be developed through a PPP formula. In 1999 the SLPA granted its first concession of this kind, with the takeover and modernisation of the old Queen Elizabeth quay by SAGT, under a build-operate-transfer model. Seven further EOIs have also been registered for ECT. The SAGT consortium is operating under a 30-year agreement, with partners in the firm including John Keells and AP Moller, alongside the SLPA and several others. In 2011 a concession for CICT was granted to China Merchants Port Holdings (CMPH). The company built the terminal, which became fully operational in 2015. In June 2016 the SLPA invited EOIs in the ECT. Consortia including a regional investor are to be given added weight in the bidding, with this likely to favour Indian investors. In October the same year Container Corporation of India (Concor) formed such a consortium, along with APM Terminals BV, John Keells and Maersk Line to make a bid. The year ahead may see this decided, although in 2016 there was some uncertainty over the government’s view on the project. According to local media reports, the SLPA would retain a 15% stake in the ECT under the current arrangements.
The expanded Port of Colombo is also located near another large-scale development in the capital – Colombo Port City. The project involves the reclaiming of around 270 ha of land from the sea adjacent to the southern harbour area. Designed by China Communication Construction Company (CCCC) and developed by its subsidiary China Harbour Engineering Company (CHEC), the new city will have special status as a financial and business district, operating under its own separate financial and legal system. In December 2016 CHEC announced the first land blocks should be available in 2019. The new development is likely to boost the port’s status as a global gateway, with space for a range of maritime-associated businesses.
Port of Colombo holds great potential as a possible destination for cruise ships, given the increasing importance of this segment for the tourism sector. The second port in the sector’s development strategy is Galle, 130 km south of Colombo. Formerly one of Sri Lanka’s most historic ports, present- day Galle has lost out to other harbours due, in part, to the local geology, as the surrounding waters are shallow and dredging is difficult. On the other hand, Galle’s historic status makes it a tourism draw; the natural harbour has been in use since the 12th century, and its Dutch fort is a UNESCO World Heritage Site. The government therefore aims to develop Galle as a cultural leisure and cruise destination. This will involve relocating Galle’s existing naval base to nearby Hambantota. The SLPA has also been looking improve the port’s cargo facilities, but in early 2017 plans for this, along with the construction of a larger yacht marina and cruise ship facilities, were still at the discussion stage.
Roughly 100 km east from Galle lies the third port in the strategy: MMRP in Hambantota. MMRP was also constructed by CCCC, with China EximBank providing a $1.4bn loan to finance it. Connected to the nearby MRIA airport, MMRP has an access channel 210 metres wide and 17 metres deep, enabling it to handle vessels of up to 100,000 deadweight tonnes. Featuring roll-on/roll-off facilities and oil, multi-purpose and container terminals, it has attracted overspill car carriers from Colombo and Chennai. Indeed, the port is a local hub for India’s small car industry, while also serving Japanese car manufacturers, such as Hyundai. Discussions are under way to develop existing facilities into a free-trade zone adjacent to the port, increasing the port’s attractiveness. However, MMRP has significant debts. In December 2016 CMPH signed a deal, later described as more of an memorandum of understanding, to buy an 80% stake in the port for $1.1bn. Essentially a debt-for-equity swap, the deal would leave SLPA with a 20% stake. However, after meeting with opposition from local residents, in March 2017 local press reported the government was considering scaling back the deal.
The fourth strategic port is Trincomalee. Another historic harbour, Trincomalee port lost ground during the recent conflict but is now catching up. The port mostly serves bulk carriers, with Trincomalee’s cement plant the main customer. Yet, as the world’s second-largest natural harbour, its role may expand in the future. Indeed, the 18,000-TEU super container vessels of tomorrow, which require 25-metre draughts, can already sail in Trincomalee Bay. The government sees Trincomalee as a key future trans-shipment harbour and has commissioned Singapore’s Surbana Jurong to provide consultancy in project feasibility studies and project implementation in mid-2016.
The future looks promising for the SLPA and Sri Lanka’s four major ports. The future of MMRP looks especially promising, if it can take advantage of its proximity to the airport and the new free trade area, encouraging the establishment of import-export industries. The coming years should also see SLA continue to build upon the country’s growing tourism sector.
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