October, 31, 2016
By Dinesh De Silva – Chairman
Import Section of the Ceylon Chamber of Commerce
The impact of shipping surcharges including terminal handling charges have been battering the Import and Export industry from 1991 to 2004. Import Export trade knowing the effects on their respective business and keeping the end consumer in mind lobbied with every government from the inception, highlighting the unfair trading practices that were taking place without any control. However due to various pressures and wrong interpretations by some parties, the past regimes were unable to make a clear policy decision on this.
As all of us are aware Importers and Exporters need to use additional service providers like Shipping, air lines, freight forwarder, Consolidators, NOVCC’s and transporters to move goods between Buyers and sellers. Accordingly, during trading one common fundamental factor applies. That is “an agreed price” for each transaction. Nowhere in the world there are transactions done without an initial agreement on Price and service. Similarly in all trade transitions as well, there is a payment for every component of the “services given” and the party who buys the service pays for it. In other words “contract party pays”.
As an example for any layman, if a seller in Kandy is sending a load of Tea to a buyer in Colombo, there has to be a transport mode. Assuming it is transported in a lorry, either the buyer or seller [contracting party] who arranges the transport agrees with a transporting agent for a price for the lorry with a commitment on delivery. Accordingly Seller or the buyer (contracting party) agrees with the Transporter for the freight “an amount” for a particular delivery point. In this case we assume seller is the contracting party for freight. Accordingly the contracted party (seller) pays the transporter “freight” for the delivery of goods in Colombo.
In this scenario Kandy seller has already paid the freight to the transporter and expect the transporter to deliver the goods to the buyer In Colombo. But the transporter does not deliver the load as expected to the buyer in Colombo but demands additional charges to release goods holding the buyer for a ransom. As a result buyer has no option but to pay transporters demands “on charges” as follows which are unfair & unrealistic charges which can be called as trade terrorism
1. Tyre Surcharge,
2. Truck guarantee charge
3. Terminal Toll charge
4. Truck cleaning surcharge
5. Truck terminal handling
6. Engine correction charge
7. Truck seal charge
8. Overtaking Surcharges
9. Traffic light surcharge
10. Round about charges
11. Truck washing charges
12. Truck status changing charges
So it is quite clear that the buyer in Colombo is not responsible for any of the above said charges as the seller has already paid freight up to the point that the buyer received goods. In other words up to the point that buyer has the control of the cargo. Finally the total surcharges demanded from the buyer is more than the freight paid by the seller in Kandy.
Similar or worse situation was happening in Sri Lanka and as well as in other countries before the legislation was made to regularize the service providers in the trade in 2004.
Accordingly below are the basic principles that should apply in a transaction of this nature,
1. Contract party pays freight to the transporter
2. If transporter has surcharges during his transporting time, all those should be included in his freight price.
3. Every transaction should have one ALL INCLUSIVE price
4. Supply and demand along with market forces should decide the “all inclusive” price.
These principals clearly give any business transparency, predictability about the transactional cost which is paramount important in everyday business. In import export trade before the introduction of terminal handling charges (THCs) and followed up with other surcharges, it operated on the above principals. Traditional freight rates included all charges namely, ocean freight charges, terminal charges and other costs at ports up to the point that Consignee received cargo. But since the introduction of the THCs in 1991, the interpretation became “freight rate” is a ‘‘port-to-port’’ charge that covers only the sea leg, while the on-shore costs of using the container terminals were charged separately as THCs, although both THCs and freight rates were collectively handle by the conferences/lines – (One party).
Accordingly, the separation of ocean freight rates from other surcharges including terminal charges have increased the overall shipping charges. Also most of the trade nowadays takes place through confidential service contracts and it is very important to identify the specific pricing tools that are more advanced and effective than the usual cartels. These action can be very evident, if one follows closely the empirical situations that are prevailing in the current market.
Identifying all the issues in depth, Sri Lankan government in 2014 during the budget proposals, proposed to set up a fully pledge Merchant Shipping Authority by introducing timely amendments to the Merchant Shipping Act, in order to prevent the monopoly in pricing in the shipping trade stating the no shipping line will be permitted to levy terminal handling and other charges in addition to freight.
This bold and pragmatic policy decision to incorporate all surcharges to Freight establishing an all-inclusive freight rate addressed a very long standing grievance in the industry which suffered due to unfair trade practices being used by various service providers. This also especially resolved the Terminal Handling Charges issue going back to 1990’s where the shipping lines arbitrarily and unilaterally introduced a separate Terminal Handling Charge (THC) which was in fact part of the freight until 1997. Also this virtually stopped large amounts of surcharges billed in UDS collected locally. Subsequently these collected large sums would have drained out of the country even violating against the exchange control laws as only Freight can be remitted out of the country... Obviously with this correction it was a major hit for the parties who were continuously involved in unfair or wrong trade practices who collected large amounts of monies.
These unrealistic and unethical surcharges including THC amounts were mounting up without any control and Importer’s business operations became so unpredictable due to ruthless surcharges levied on import consignees especially on LCL imports. Zero freight was another trick that the service providers used on the import community to rip them off by way of additional surcharges after the shipments landed in Colombo. All complaints / disputes were never heard by the service providers and majority of the CIF shipments landed in Colombo was a disaster for the consignees. Many service providers demanded only cash payments to release the “Delivery orders”. Until all unrealistic charges were paid the goods were held for ransom incurring demurrage. Accordingly, Importers absolutely did not have any option but to pay the absurd surcharges including arbitrary amounts of THC’s. As a result, all these additional costs had to be passed to the end consumer or had to add to the re-export price. Both these actions gave adverse effects to the country as either it effected the cost of living of the country or the re- exporter lost the competitiveness in the export market. Finally form an era of agony, with the regularization of the all-inclusive freight rates, the import community got revived and were able to return back to competitive business which created ease of doing business with confidence within the business community.
Also this practical approach was a great relief especially for the SME Importers /exporters, and the domestic consumers. This course of action also received high praise from the international and local shipping communities. The style in which the anti-competitive practices pragmatically fixed without intervening in pricing (shipping rates are not regulated globally) proposing a mechanism to ensure fair trading practices from which all stake-holders of the supply chain and consumers getting benefitted was commendable.
In modern day multimodal transportation, freight rate is considered and defined as “cost of moving cargo from point A to B” or “point of acceptance to point of delivery,” Then all charges in that space should be in the freight cost. Freight is not a charge derived out of sales contacts or INCOTERMS but from the contact of carriage. Accordingly with this legislation it became a good system to the country where and both the shippers and the service providers who are doing an honest job benefit. During the latter stages, identified 50 +surcharges was spreading like a virus beyond boundaries, including the zero freight concept where the importer finally demanded by the service provider to pay much more than freight as surcharges. Finally through the regulation majority of the unfair and unethical malpractice came to an end and further the freight market settled down according to supply and demand which brilliantly helped all parties in the business disallowing a handful of parties who held importers and exporters of Sri Lanka to a ransom in order to make profit by manipulating the market situations.
Currently the government is at the top gear to improve the ease of doing business and to improve trade facilitation in this country. They have clearly identified the importance in removing the trade barriers, unethical trade practices which enable to keep the cost at the most competitive levels to complete at international levels while minimizing the operational times. Needless to say Sri Lanka is at a critical juncture to promote trade and FTA’s etc. In a situation like this, a good governance regime will never allow unethical and unfair reading practices to rise. Due to this surcharges issue the Import and Export trade was adversely affected while the additional cost was passed to every citizen of Sir Lanka. So in this context, the trade is very confident that no one will attempt to open a can of worms again within the import /export community as this was like a badly infected trade wound that got healed in 2014 with an invaluable policy decision which received international recognition as well. However closely observing the recent media articles, the trade feels, that some interested groups are trying to paint the picture with different colours by giving unrealistic facts. In our view the respective businesses should be innovative and should create proper pricing mechanisms without jeopardizing the Import Export community again when the government is fully focusing on improving the country’s GDP with the support of International Trade.
About the author
Dinesh De Silva, functions as the Chairman of the Import Section of the Ceylon Chamber of Commerce. He was also the Immediate Past Chairman of the Sri Lanka Shippers’ Council.