VZCZCXRO1912
RR RUEHBI RUEHCI RUEHLMC
DE RUEHLM #1134/01 2281101
ZNR UUUUU ZZH
R 161101Z AUG 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 6629
INFO RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1270
RUEHKA/AMEMBASSY DHAKA 0351
RUEHIL/AMEMBASSY ISLAMABAD 7334
RUEHKT/AMEMBASSY KATHMANDU 5449
RUEHKP/AMCONSUL KARACHI 2232
RUEHCG/AMCONSUL CHENNAI 7926
RUEHBI/AMCONSUL MUMBAI 5575
RUEHCI/AMCONSUL KOLKATA 0356
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 03 COLOMBO 001134 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
STATE FOR SCA/INS AND EEB/TRA/OTP 
STATE PASS USTR FOR ADINA ADLER 
COMMERCE FOR JONATHAN STONE 
MCC FOR S. GROFF, D. TETER, D. NASSIRY AND E. BURKE 
TREASURY FOR LESLIE HULL 
 
E.O 12958: N/A 
TAGS: ECON EINV ETRD EWWT CE
REF: 06 COLOMBO 2114 
 
SUBJECT: SRI LANKA: COLOMBO PORT STRUGGLING TO KEEP ITS DOMINANCE IN 
SOUTH ASIA 
 
¶1.  SUMMARY:  Due to congestion, low productivity, increasing 
freight rates, and security concerns caused by the conflict, global 
shipping lines have begun bypassing Sri Lanka in favor of India's 
emerging ports.  In the last six months, shipping costs from Colombo 
have nearly doubled to $600 per TEU and four major global shipping 
lines -- Maersk, Hanjin, Norasia, and United Arab Shipping Company 
-- have diverted services to India.  Exporters, whose price- and 
time-competitiveness depend on the Colombo port's transshipment hub 
status, are getting worried.  Shipping lines that have long valued 
Sri Lanka's location and formerly low-cost operations are also 
concerned.  As 95% of Sri Lanka's external trade is seaborne, the 
Colombo port's declining competitiveness will also adversely affect 
the island's attractiveness for manufacturing investment.  Port 
officials are aware of the challenges and believe they can meet them 
with a planned port expansion.  However Sri Lanka cannot afford 
further delays in this major project, inefficiency caused by 
security concerns, or loss of container traffic to competition from 
Indian ports.  End summary. 
 
¶2. (U) The port of Colombo serves as the region's primary maritime 
transshipment hub due to its geographical position in the Indian 
Ocean's East-West navigation lanes.  Today it is rated as one of the 
top 35 ports in the world.  It currently handles 3.1 million 
containers per year, the largest volume in the subcontinent, and is 
near capacity.  Of this, 75 percent are transshipments bound 
primarily from India and Southeast Asia to Europe and the 
Mediterranean.  In the first quarter of this year, the port's local 
export volume increased 5 percent and transshipment growth by 10-15 
percent. 
 
PORT EXPANSION PLANNED, BUT DELAYS LOOM 
--------------------------------------- 
 
¶3.  (U) The port of Colombo is comprised of two terminals.  The Jaya 
Container Terminal (JCT) is government-owned and operated, while the 
South Asian Gateway Terminal (SAGT) is privately owned by a 
consortium of local and global shipping, commerce and finance firms. 
 To maintain its status as a leading transshipment hub, the port is 
undergoing a $700 million expansion that will triple capacity to 
accommodate around 12 million TEUs (standard 20-foot equivalent 
unit/container) each year, enabling it to become the logistical 
gateway to the Indian subcontinent and the Middle East.  The Asian 
Development Bank is financing the project's $300 million dollar 
breakwater.  The Colombo Port Expansion Project began in late 2006 
and is targeted for a 2010 completion (reftel). 
 
¶4.  (SBU) Shipping lines, however, are skeptical that the new "South 
Port" will be completed on time due to delays in construction.  The 
existing port infrastructure has not been sufficiently upgraded to 
keep up with the increase in volume and has resulted in lower 
container-handling efficiency and increase in operational costs. 
These are prompting shipping lines to change their routes to 
directly call in India instead.  With more productive and less 
costly ports such as Mumbai and Chennai developing in India, Sri 
Lankan exporters are worried that Colombo is losing its status as a 
major shipping entrepot and its niche in the global market. 
 
ENHANCED SECURITY MEASURES SLOW PRODUCTIVITY 
-------------------------------------------- 
 
¶5. (SBU) In the last six months, four major global shipping lines -- 
Maersk, Hanjin, Norasia, and United Arab Shipping Company -- have 
diverted services to India.  American President Line and OOCL will 
join the exodus in the coming weeks, according to the country 
manager of a major shipping line.  The port's congestion is a result 
of low efficiency, inadequate infrastructure, and the closure of one 
of its two entrances.  In October 2006, the Sri Lankan Navy closed 
the northern entrance to protect the inner harbor from attacks by 
the Liberation Tigers for Tamil Eelam (LTTE).  The Chairman of the 
Ports Authority, Saliya Wickramasuriya, told Econoff that this move 
decreased total port productivity by 33 percent.  Overall, Colombo's 
 
COLOMBO 00001134  002 OF 003 
 
 
current berth productivity -- its ability to move a certain number 
of containers per hour -- is around 50.  The privately-owned SAGT 
moves 27-30 containers per hour, while the JCT moves 15-18 per hour. 
 As the $155 port tariff per TEU is the same for both terminals, 
shipping lines prefer to establish contracts with SAGT, depending on 
time compatibility with their vessels' routes.  Both terminals are 
subject to increased police checks of vehicles and container 
inspections which significantly slow the container turn-around time. 
 By comparison, Chennai's berth productivity is 130, and Singapore's 
is 100. 
 
INCREASED COSTS CAUSE RIFT BETWEEN LOCAL 
EXPORTERS AND SHIPPING LINES 
---------------------------------------- 
¶6.  (U) In the past six months, shipping costs from Colombo have 
nearly doubled to $600 per TEU.  Local exporters believe that 
shipping lines are unnecessarily upping the freight rates.  The 
logistical manager for Sri Lanka's Joint Apparel Association Forum 
told Econoff that the local manufacturing industry cannot compete 
with China and Vietnam if the shipping lines "arbitrarily" tack on 
"unwarranted" charges in an "untransparent" manner. 
¶7.  (U) Shipping lines counter that overall costs have increased 
throughout the region and that Sri Lanka's freight rates are still 
comparatively low -- almost 50 percent cheaper than in China. 
Shipping lines also contend that increased port operational costs in 
Colombo are cutting into their profit margins and must be recovered 
by raising the previously-low freight rates.  For example, since the 
March and April 2007 Tamil Tiger aerial attacks, many shipping lines 
have to pay "war risk" surcharges on commodity shipments.  Rising 
local salaries and the worldwide rise in fuel prices have also 
contributed to the higher freight charges.  Delays getting into the 
Colombo port are also costly, according to the country rep of a 
major shipping line; small vessels often must wait one or two days 
outside the port, with a cost of $20,000 to $30,000 a day.  Thus 
shipping companies are finding it more profitable to fill up their 
vessels with Chinese cargo, rather than incur high port costs in Sri 
Lanka while carrying cargo at cheaper rates. 
LESS AND LESS CONTAINER SPACE FOR SRI LANKAN EXPORTS 
--------------------------------------------- ------- 
 
¶8.  (SBU) Maersk country director told Econoff that many shipping 
lines predict that container volume at the Colombo port will level 
off in two years, if not decline.  Between 2005 and 2006, the number 
of import containers increased by only 1 percent and exports by 5 
percent.  With the European market demanding more goods from China, 
and China's exporters willing to pay higher freight rates, cargo 
vessels from East Asia heading west are almost full before they stop 
in Colombo, leaving little space for Sri Lanka's exports.  Today, 
there is a shortage of 650 TEUs a week for the Colombo-Europe 
sector.  Further, more shipping lines are now focusing on UK-India 
trade, in which India's container volume is ten times higher than 
Sri Lanka's.  Direct services from India obviate the need for Indian 
cargo to be transshipped through the Colombo port, which can save 
around $100 a TEU for the shippers.  As a result of these 
developments, a rep from Sri Lanka's Joint Apparel Association Forum 
told Econoff, Sri Lankan exporters have access to 15 to 20 percent 
less space in incoming container vessels than they did a year ago -- 
further pushing up freight prices. 
 
COMPETING AGAINST INDIA 
------------------------ 
 
¶9.  (U) With productivity three times faster and operational costs 
ten to fifteen percent cheaper than Colombo's, Mumbai and Chennai 
are quickly gaining Colombo's customers.  India's private sector is 
pushing to modernize its ports to provide higher quality shipping 
services than Colombo's.  Trade volume between China and India is 
surging, and within the next four years India expects 18 percent 
growth in cargo volumes to Europe.  Though Colombo currently handles 
23 percent of Indian transshipment volume, more shipping lines are 
making direct calls to Indian ports.  Sri Lankan exporters are 
 
COLOMBO 00001134  003 OF 003 
 
 
worried that they will miss the opportunity to capitalize on India's 
rapid economic growth, especially if the Colombo South Port 
expansion drags on past 2010. 
 
¶10.  (SBU) In response, Sri Lanka's Secretary of Ports and Aviation, 
Tilak Collure, confidently told Econoff that these criticisms are 
"exaggerated" as shipping lines are always looking at other ports 
and that India provides "healthy competition" for Colombo.  He 
asserted Colombo's geographical location gave it an inherent 
advantage over India's ports.  Also, he contended, many exporters 
would prefer to use Colombo because of its participation in U.S. 
port security programs such Megaports and the Container Security 
Initiative.  Further, the port is also attempting to speed the 
expansion process through various strategies such as adding more 
berths for feeder vessels to reduce congestion.  Sounding less 
optimistic, the Chairman of the Ports Authority told Econoff that 
though Indian ports are not currently large enough to replace 
Colombo as transshipment hubs, they will be a major threat in five 
years if Colombo's own expansion plans are not fulfilled. 
 
¶11.  (SBU) COMMENT:  India's rapid economic growth will be a huge 
boon to the Colombo port if the port can retain its transshipment 
hub status.  However, if Colombo port fails to keep up with its 
Indian competitors, either due to lagging efficiency or delays in 
the South Port expansion, then its transshipment status could be 
jeopardized.  The other major challenge for Sri Lanka is not letting 
the security situation impede port operations excessively.  This is 
difficult, because preventive measures, like the closure of one 
entrance, harm efficiency, but a successful attack at the port would 
be even more damaging.  At stake in all this are not only the 
significant revenue, jobs, and related business that derive from the 
transshipment business, but also the competitiveness of Sri Lankan 
exports, especially those of the critical garment sector. 
BLAKE