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Cablegate: Expanding the Port of Colombo: A Viable Future

VZCZCXRO5766
RR RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHLM #0971/01 2941002
ZNR UUUUU ZZH
R 211002Z OCT 09
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 0654
INFO RUEHKA/AMEMBASSY DHAKA 1964
RUEHIL/AMEMBASSY ISLAMABAD 9000
RUEHJA/AMEMBASSY JAKARTA 0625
RUEHKT/AMEMBASSY KATHMANDU 7238
RUEHNE/AMEMBASSY NEW DELHI 3383
RUEHGP/AMEMBASSY SINGAPORE 5776
RUEHCG/AMCONSUL CHENNAI 9561
RUEHKP/AMCONSUL KARACHI 2547
RUEHCI/AMCONSUL KOLKATA 0437
RUEHLH/AMCONSUL LAHORE 0087
RUEHBI/AMCONSUL MUMBAI 6861
RUEHPW/AMCONSUL PESHAWAR 0367

UNCLAS SECTION 01 OF 02 COLOMBO 000971

SIPDIS

DEPARTMENT FOR SCA/INSB

E.O. 12958: N/A
TAGS: CE ECON ETRD PGOV EINV EWWT
SUBJECT: EXPANDING THE PORT OF COLOMBO: A VIABLE FUTURE
SHIPPING HUB?

1. (SBU) SUMMARY: The Government of Sri Lanka sees
substantial economic potential in becoming a transshipment
hub, and to that end, the Port of Colombo is poised for
significant physical growth over the next several years. The
port currently has both government and privately run
facilities, and it is looking to add a third facility
primarily funded by a Chinese company. The Sri Lankan Port
Authority (SLPA) believes this growth will position the port
as a major international hub. Despite ongoing SLPA efforts
to expand the size of the port, there are no current
indications that container traffic is poised to increase
sufficiently with the port's expansion. Current facilities
have existing space for growth in their operations. A rapid
port expansion may create excess space with little
possibility of near-term use and return on the investment.
End Summary.

THE CORPORATE PLAYER AT THE PORT OF COLOMBO

2. (U) South Asia Gateway Terminals (SAGT), the sole private
port operator at the Port of Colombo, has increased its
business in a down market. In 2008 SAGT handled an average
of 1.7 million twenty-foot equivalent units (TEU). Through
September 2009, SAGT has already handled more than 1.8
million TEU's with an expected 2 million TEU's by the end of
the year. 82% of SAGT's container business involves
transshipment to/from India, with the remainder being
domestic container traffic destined for locations generally
within a 30 kilometer radius of Colombo. SAGT receives four
times more revenue from domestic cargo than from transshipped
cargo. The world economic crisis has spurred an 18%
reduction in domestic container traffic at SAGT while
transshipment traffic has risen, in part due to rebates
offered to shippers who increase their business at the port.
Maersk and Mediterranean Shipping Company S.A are currently
SAGT's two primary shippers. SAGT maintains a 16 meter
access channel for its 940 meters of berthing space and a 15
meter dredge depth in its harbor area. SAGT also maintains a
storage yard of more than 20 hectares and can accommodate
5,500 ground slots at any given time. SAGT currently
averages 27 container moves per hour when operating at
optimum efficiency.

THE GOVERNMENT PLAYER AT THE PORT OF COLOMBO

3. (U) The SLPA is the Government of Sri Lanka's (GSL) port
operator and controls the majority of the Port of Colombo.
In 2008, the SLPA handled only 1.7 million TEU's despite
being almost twice the size of SAGT. The port's Harbor
Master advised Econoff that SLPA's container transshipment
business will see a 10%-12% reduction from 2008 numbers. The
SLPA has a maximum capacity of 3.0 million TEU's per year,
and is currently running well under maximum efficiency. SLPA
has more than 1200 meters of berthing space for container
traffic and has an 18 meter dredge depth in its harbor area.
70% of SLPA's business is transshipment (70% of that traffic
is from India with much of the remaining percentages coming
Pakistan and Bangladesh). The Harbor Master was keen to
point out to Econoff that the SLPA cannot pick and choose its
customers and it must accept all traffic, large or small,
requesting use of its facilities. Currently, the SLPA
averages 25 container moves per hour when operating at
optimum efficiency, an increase from an average of 18-19
moves six months ago. The SLPA would like to make 75 total
container moves per hour per ship. Inefficiency seems to be
a significant issue at the SLPA. The Harbor Master commented
that SLPA has 12,000 personnel at the Port of Colombo,
although it really only needs 6,000 personnel. In contrast
the private SAGT has approximately 1,000 workers.

PLANS FOR EXPANSION

4. (U) Plans are underway to significantly expand the size
of the Port of Colombo with the construction of the southern
container harbor in a new south terminal. The port has ample
space for future construction of planned east and west
terminals. Each terminal will be 1200 meters long with three
berths. The dredged depth of the harbor will be 18 meters

COLOMBO 00000971 002 OF 002


and the access channel depth will be 20 meters. A China
Merchant-Aiken Spence consortium is currently the sole bidder
for this project. China Merchant will be a 70% stakeholder,
Aiken Spence a 15% stakeholder, and the GSL will own the
remaining portion as a silent stakeholder. Completion of the
southern container harbor should dramatically increase the
available space for container business at the port.
According to the SLPA, a port operator will be awarded a
long-term contract to maintain the southern harbor as well as
provide all container-related services. The SLPA hopes that
port expansion will position it as a major port hub at the
cross roads of East Asia and the west, although no
commitments have been made by mainline or feeder operators
for new or additional traffic at the port.

5. (SBU) The state-controlled Chinese company was able to
move in as a majority partner in the South Port project after
the Government of Sri Lanka failed to award the bid
previously. Two years ago there were five bidders for the
South Port project, including large companies such as
Hutchensons, Maersk, CMA Haleys, and China-Hong Kong
Shipping. Aiken Spence was in partnership with PSI, a large
Singaporean company, but the government never awarded the
contract. There has been local speculation that China
encouraged the GSL not to award the contract. The GSL
finally re-bid the contract last year, but due to the global
financial crisis, the only bidder was the China
Merchant-Aiken Spence consortium. Their bid was considerably
lower than previous bidders' efforts to secure the southern
container harbor contract, so the GSL lost many millions by
not accepting the first rounds of bids.

6. (SBU) Comment: The GSL's plans to expand the Port of
Colombo are ambitious and in line with the "if you build it,
they will come theory." Unfortunately, there is no
indication that "they will come." In order to become the
true international container hub the SLPA wishes the port to
be, the port will need to attract significantly more
transshipment traffic as well as increased local container
traffic. There is no commitment or pledge by any mainline or
feeder operators to increase container business at the port.
While SAGT seems to running at close to peak efficiency with
room for moderate growth, the SLPA is more than 1.3 million
TEU's short of capacity at its existing facilities.
Available capacity will likely grow given ongoing efforts
underway at SLPA to retrofit two general cargo berths to
handle container shipments. It may provide difficult if not
impossible to become the container hub for Asia if a large
percentage of existing capacity currently remains unused.
GSL plans to expand the port look great on paper, generating
many new jobs, but the commercial viability of the expansion
project is in doubt. End Comment.
BUTENIS

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