Can Chittagong Port be made a Free Port?

The Chittagong Port handled over 28,000 tonnes of cargo and more than one million cargo-containers during the past year. The annual growth of container handling is growing on an average of 15 per cent. In fact, the port activities are growing at a very high rate and this growth is likely to continue in the foreseeable future. In addition to improving the efficiency of the principal port of the country, many people are also advocating turning the Chittagong Port into a Free Port to attract increasing amount of Foreign Direct Investment (FDI). A free port is exempt from customs duties and regulations, where goods may be stored or processed into manufactured goods. Can the Chittagong Port be made a Free Port? Making Our Economy Right (MOER) organized a round-table discussion on February 12, 2011 on this issue. The conference was held at the boardroom of the Financial Express, which was the media partner of MOER for this event. Following is a transcript of the round-table discussion: Chowdhury Ashraf Hossain: I welcome all of you today to our first discussion programme after many years. Our economy is the most important issue for us today. We are not economists but that should not mean we have no say about our economy or that we are not concerned about it. We would want to discuss more and not leave this important matter to politicians and experts only. Since its, inception in the early 1990s, MOER has been endeavouring to promote a liberal economy for Bangladesh. It believes in the philosophy of free market and individual freedom, both governed by firm rule of law. MOER backs market economy, less government, and rule of law. It is not a research body but associated with leading free market think tanks and research institutions of the world sharing the same vision and economic philosophy. I request former state minister for foreign affairs and Member of Parliament Abul Hasan Chowdhury to chair the round-table discussion. Abul Hasan Chowdhury: I am happy to chair this round-table discussion. Many personalities here are more competent on today's topic than I am. I do not know much detail on the subject but I think I will learn much after the discussion. A Qayyum Khan: I want to begin my paper citing a brief history of the Chittagong Port. Malayan history noted the existence of Chittagong Port in the fourth century BC. Renowned traveller Ptolemy, Fa-hien, Hew-en-Tseng, Ibn Batutta had also mentioned about Chittagong Port. It was the principal port for the eastern and northeastern regions of India before colonization. It was also an important port during the World War II. The port is about 12 kilometres from sea. The Chittagong Port Authority (CPA) manages the port. It handles more than 28 million tonnes of cargo and over 1.0 million cargo-laden containers a year. A free port or section of a port is exempt from customs duties and regulations. Goods may be stored or processed into manufactured goods. Export Processing Zone is a type of free port facility restricted for export only. There are many types of free port facilities. Free Trade Zone (FTZ) is the term that covers all variants of free ports. Some 98 per cent of the world's FTZs are in Latin America, Caribbean and Asia. Electronics and textile are the largest investors in the FTZs. Port hinterland is the new concept in transportation geography. Bonded logistics zone, economic and technological development zones, export processing zones, border and economic cooperation zones, tourist and holiday resort zones and free ports are the types of free port facilities. We might cite some case studies from other countries on the free port facilities. Creation of FTZs does not guarantee economic success. We may cite the experiences of Dakar in Senegal, where it did not work out. But Mauritius has archived full employment after the whole country became a FTZ. Sustainable economic growth was achieved in China following the establishment of FTZs, starting in 1980. Korea began setting up FTZs in early 1970s focusing on heavy and chemical industries. Its objectives were to attract foreign direct investment, promote export, transfer of technology and knowledge, create employment and set up backward linkages. In Bangladesh, the Korean EPZ is the country's first private sector EPZ located on the southern part of the river Karnaphuli in Chittagong. It faces inadequate power supply and natural gas. The Chittagong Port is presently termed as a costly and risky port. The Transparency International, Bangladesh (TIB) report of 2007, identified numerous problems obstructing the smooth functioning of Chittagong Port. There are irregularities in personnel management and powerful people have illegally occupied port land. There are irregularities in export and import handling of cargoes and corrupt practices are rampant by port employees including pilots and crane operators. To become a successful free port, the following conditions must exist: attractive investment packages; flexible and dependable business regulations; adequate business and ICT infrastructure; land and manufacturing facilities; reliable and dependable utility and logistics services; and a one-stop service window. There is certainly a need for a national consensus on what we want to accomplish. I think it is possible to convert Chittagong Port area into a vibrant FTZ; problems impeding the process are same as those impeding Bangladesh from reaching double-digit economic growth. A Free Port in Chittagong could potentially attract global investors and significantly expedite the growth rate. Prof Mahbubullah: I am pleased to learn about the historical perspectives of Chittagong Port through the presentation made earlier. We know that the Arab and Chinese used the Chittagong Port for transportation of their goods. We should know the history. We often fail to achieve our targets due to ignorance about the history. However, ideas are very important for economic development. The nations, which achieved higher economic growth, had their own creative ideas for their development. We should also create such ideas for our development. If we avoid such ideas, I think that will be similar to keeping our eyes closed. We are hearing about the Free Port for long. If it happens, what will be its impact on our revenue earnings, politics and society, above all, what will be its impact on our national security? We have EPZs. Are we really operating the EPZs effectively? If not, then why the question of setting up of a Free Port? We introduced EPZs to attract FDI (Foreign Direct Investment). We provide land and other facilities under the EPZ facility to attract the foreign investors to invest there. Have we achieved our goals of attracting FDI in the EPZs? Have we minimized our savings gap, technological gap, human resources gap, management gap and employment gaps following the FDIs in the EPZs? The main criticism about the EPZs from the leftist point of view is that it (EPZs) does not create adequate employment vis-à-vis per unit of capital investment. In fact, it employs only in special cases. Regarding setting up of a Free Port, what will be its operational features? Do we really need a Free Port when we already have EPZs? China has many Free Trade Zones, especially after opening up its economy during the 1980s to attract FDI. Capital now has emerged as a global resource. It goes wherever it feels comfortable and earns higher profit. If we turn Bangladesh into an ideal place for attracting global capital, it will come here as well. But, prior to this, we must set the basics right about property rights and enforce the lacks effectively. Laws and economics are deeply related. To create a favourable atmosphere for attracting global capital, the issue of good governance is also important. But we will not attain such Washington-based good governance in our country as we have poor per capita income. We should concentrate rather on the 'good-enough' governance for the next 15-20 years. It will help attract FDI and employment in the country. For this, we need a good education system. Both traditional and technical education institutions are now politicized. We should improve technical and vocational education for our industrialization. Prof Abu Ahmed: As a citizen of Bangladesh, I favour the concept of a Free Port or EPZs, but there should be no subsidized input provided by the government. The government practice of building infrastructure by investing tax-payers money and making foreigners its beneficiary should be stopped. I want an equal treatment both for foreign and local investors. I am also in favour of expanding and making Chittagong Port efficient, and making it an important location or port of calling in southeast Asia. But who will provide the capital for investment? An investment of Tk 150 to Tk 200 billion will be needed for the expansion of Chittagong Port. I think the Chittagong Port Authority Act should be amended immediately for making it a public listed company. I think there will be no fund crisis for expanding and making the port efficient. It should not be a government entity. Many would argue for renting out the port to a foreign company for a period of 20-30 years. I do not favour this idea. Mobilizing money through the capital market will ensure the ownership of the port by the people of the republic. Turning Chittagong Port into a Publicly Limited Company will solve many administrative and accountability issues. Its efficiency will grow significantly after turning it into a listed company. But the majority of the shares must be held by the government. Even foreign investors can invest in it, but their participation should not exceed 10-15 per cent. The existing CPA Act must be amended if we want to make Chittagong Port into a vibrant seaport. Rather, I think Chittagong Port should be made into a publicly-listed company. There are many instances in the world where ports are publicly listed companies. Even airports like London's Heathrow Airport are listed in the bourses. Our bureaucracy is the main hurdle to making listed companies of the state-owned enterprises (SOEs). The bureaucrats give notes opposing the listing of the SOEs. They say that listing will cause labour unrest in the industry. Qayum Reza Chowdhury: I think Mongla Port should be upgraded to handle the increasing number of containerized cargoes. As our trade is growing due to GSP facilities given by European Union (EU) countries as a least developed country. Abul Hasan Chowdhyury: Mongla has very low drought. It is not possible to turn Mongla as an effective operating port. Dr. Zahid Hussain: I will give some observations on the changing global context. Times have really changed. Most of the ports today are competing with one another on a global scale with tremendous gains in productivity in ocean transport over the past decades. The 21st century, in my view, requires radical changes in the business base underlying port operation. The world economies continue to be increasingly interrelated because of increasing trade and the growing trend towards globalization of production. Manufacturers have been concentrating production capacity in fewer locations, replacing the traditional system of nationally based production with focused manufacturing. The entire production of a particular product, in some cases, is focused on a single location. Globalization of production has sharpened the need for ports to be value-added, not of value subtractions in the supply chain. Major technological changes are taking place in the ocean-going shipping sector, which impart requirements for port infrastructure and services. The most obvious is the increasing containerization of global trade. This has dramatically reduced personnel requirements for cargo handling and vessel berth productivity and increased capital-intensity of port operation. As containerization has spread in ocean shipping, distribution has increasingly evolved into a hub. Regional hubs are being increasingly used for transshipment of containers. The most important attributes that sea carriers look for is the strategic locations of the hub relative to providing vision and fixed destinations of container traffic. Given the growing concern about protecting the environment, ports are increasingly aware of port service procedures. But those changes also provided opportunities for new ways of doing business and opening the door to entry of new players throughout the range of port activities. In short, it is a brand new era for every one involved in the port sector and the opportunities and changes are substantive. There is rivalry among the existing competitors, continuing threat of new entrants, potentials for global substitute, pressures of powerful customers and suppliers, and dealing with these changes is a continuing challenge for the port managers. Is Chittagong Port ready to cope with these changes? What would it take? What would freeing Chittagong Port mean? Neo G Mendes: Chittagong Port handled over 1000 ships during 2010. Annual growth of container handling is an average of 15 per cent. It handled 1.2 million containers last year. In fact, the port activities are growing at a phenomenal rate. But the land availability at Chittagong Port is very limited. It is now allowing private inland container depots located in Chittagong. This has reduced the burden of Chittagong Port to a great extent. Railway wagons carry to and from Chittagong Port around 80,000 containers a year. So, the highest numbers of containers are being carried by road transportation. But the road infrastructure is very poor taking much time to carry the containers leading to losses by the manufacturers or other consignees. Apart from this, transportation of containerized cargo to West Bengal of India, Bhutan and Nepal by road also is not worth considering due to the bad shape of road infrastructure. However, many have termed Chittagong Port as expensive. It is an expensive port in terms of its productivity. Different terminals including Korean EPZ have now been built in and around the Chittagong Port. They have some potentials, but I think there is no future in the long term. Currently, two weeks are required for completing procedures relating to berthing and customs at Chittagong Port for a Dhaka-bound container. This causes additional cost for the consignees as well as for the feeder vessels. An additional day of stay of a feeder vessel needs at least US$ 10,000 as chartering cost. If we load containers to a small barge, popularly called shuttle vessels, it would minimize cost drastically. Most of the vessels plying the Singapore-Chittagong route are equipped with cranes (gears) and they can load 200 containers within 68 hours. We can reach 200 containers by barges by maximum 48 hours by river routes. Now a container terminal is at the final stage of completion at Pangaon near Dhaka city. I think creating infrastructure for river routes will facilitate the country's trade. You can set up Free Port in any place of the country and benefit will be ensured if the shuttle vessel services are ensured. The German government wants to fund $ 100 million for procurement of shuttle vessels but it is now pending at the Ministry of Shipping. I hope that the ministry will give its approval to the proposal. For free trade zones, it can play an effective role. Many have talked about the deep-sea port. But it will take time at least 810 years to complete. Mahfuzullah: During my active journalist career, I visited Chittagong Port. I have observation relating to the concept of Free Port. Will our social and religious values allow it (free port)? I am giving you an alarming statistics about the coastal regions of our country prepared by a research organization styled the Centre for Environmental and Geographic Information Studies (CEGIS). It says that there will be a rapid change in the coastal areas by the next 25 years as one-third of 1.0 billion tonnes of sediments are developing on the coastal areas each year. Will we be able to use Chittagong Port by the next 25 years? So, I think we should concentrate on the setting up a deep seaport. We have to take a political decision on it. We must also think about human factors. Deploying law-enforcing agencies does not mean improvement of port's efficiency. Zillul Hye Razi: There are free ports existing in different countries. Even many European countries have free port facilities. I find its similarity with a restaurant where customers will be entertained. There will be no customs duties and regulation but many warehouses. Chittagong Port is a partially free port in a sense that manufacturers import yarns without giving taxes. I feel our discussion topic today should have been 'Can our deep seaport be a free port?' instead of 'Can Chittagong Port be a free port?' Osman Chowdhury: India and China are very much interested in providing assistance to set up a deep seaport in Bangladesh. A deep seaport needs investment worth around US$ 9.0 billion, so we have to calculate its returns for a period of minimum 10 years. The present value (PV) criterion should be evaluated before investing in the deep seaport. Syed Javed Ahsan: Chittagong Port is a very inefficient seaport. Local textile and cotton spinners have been suffering for long due to port congestion and delay in delivery. Bangladesh is the second largest raw cotton-importing country in the world after China. Most of our raw cotton comes from Uzbekistan through a port in Iran. But we have to pay US$ 1100 for every container from the Iranian port while China gets the same at a freight cost worth $200. This results in our products becoming uncompetitive. I propose for building a big warehouse for raw cotton at the EPZ so that spinners can get it quickly. M. H. Khaleque: The idea of a Free Port is not about whether Chittagong seaport is equipped to handle greater stream of vessels but it is about removing barriers to trade. Customs duty that is mainly tier-based and varying from product to product is a great hindrance to trade. If a port is free of these hindrances, greater trade volume could follow. Capacity improvements to handle more cargo ships would also happen. Tanveer Rahman: Hong Kong is a Free Port and even though it is just a small island, its total export and import figures are staggering. If a country like Bangladesh offers a Free Port facility like Hong Kong, its import and export trade volume could exceed even that of India. Nizam Ahmad: I totally agree with the comments of the previous discussants. Free Port is not about the existing capacity or even its capacity to handle greater number of cargo ships, or whether ships at all would enter the port given its weak infrastructure, but it is about increasing the freedom to trade. Abul Hasan Chowdhury: I now end this programme. It has been informative to listen to the participants and we hope MOER would do more of these as economic issues are of far greater importance to the people of Bangladesh.