Choices regarding Hambantota

Entering into a PPP with a Chinese company is the right thing to do; it should be supported – the issues at stake are much larger than the jobs of workers in a port that does not attract ships

As the debate on the public-private partnership in Hambantota with China Merchant Port Holdings began to heat up, I commented on Facebook that the only people who could make a success out of Hambantota were the Chinese. This is written in response to requests that I expand on the claim.

To simplify, ports do two kinds of business: they serve the country or region they are located in (e.g., Dar es Salaam serving Tanzania, Zambia, Rwanda, etc.) and they handle transshipment traffic. Sri Lanka, being an island does not have a large hinterland like the port of Dar es Salaam. 

The small Sri Lankan market cannot support a world-class port like Colombo (30th largest container port in the world), let alone a second port. Colombo’s position is supported by transshipment business from India (over 70% of total volumes).

For Hambantota to succeed as a port, it has to serve the region. It made a good start as specialised vehicle transshipment port. But obviously it was not enough to sustain the port and pay off the loans. Unlike loans taken from the ADB or the World Bank, these loans had short grace periods which have already expired.

Where was the business for Hambantota Port? It could not take business from Colombo. Hubs are self-reinforcing and it takes real effort to displace one. So Hambantota has to get new business, not Indian business.

In the last few years, the Bay of Bengal has begun to open up. Six of the 10 fastest growing economies in the world are around the Bay: Myanmar, Bhutan, India, Lao PDR, Cambodia and Bangladesh. China is making serious efforts to develop alternatives to running vital supplies through the Malacca and Lombok-Makassar Straits. The Malacca Strait is so narrow that some of the big tankers that bring energy to China from the Middle East and Africa have to go through the Lombok-Makassar Strait even now. Developing an alternative is a strategic necessity. 

China has already built a new port on the Myanmar coast in Kyaukphyu. Oil and gas pipelines already connect Kyaukphyu to Kunming, the capital of the Yunnan Province. Plans have been made to connect Kyaukphyu to the interior of China by road and rail, but are currently suspended due to domestic concerns in Myanmar.

Other ports are being planned in the northern Bay. Japan and Bangladesh have agreed to build a new deep-water port in Matarbari. The Indian Cabinet has approved funds for the development of the Port of Sittwe. Projects for Dawei and the Kra Peninsula are sporadically discussed. All developments except Matarbari and Sittwe involve China.

Shipping routes into the Bay are likely to develop in the next few years. If China and Myanmar can agree on transit arrangements, this will happen soon and will be massive. Even if not, the rapid growth in the North Eastern littoral will develop a lot of new traffic. Hambantota and Trincomalee are ideally positioned to serve those routes and the transhipment and ship supply businesses that will result.

The immediate problem is Hambantota. Chinese shipping lines are key to Hambantota’s success. While the Sri Lanka Port Authority was in charge, they did not come. Sri Lanka had to pay the loans back the Ex-Im Bank of China even though the port was not generating business. Is it not a good idea to go into business with the people who can give business?

Some say the $ 1.3 billion upfront payment is not enough. They say the port should have been concessioned out by international tender. When the key to the success of the port is held by China what is the value of an international competition? A risk sharing PPP is the right solution. The port requires major additional investments. The China Merchant Group will have to make the investments. When there are profits, the government will get 20%. That is in addition to the upfront payment.

A PPP is a complex transaction. The transaction which converted the Queen Elizabeth Quay into the profitable PPP known as the South Asia Gateway Terminal is said to have been underpinned by 1,500 pages of legal documentation. Good negotiating and drafting skills are essential for these kinds of transactions. All we appear to have at this point is agreement in principle. The real test is how the documents are drafted and then how the contracts are enforced. 

Could a better arrangement have been arrived at? Yes, back in 2006 when the decision was made to build the port. If a PPP was entered into at that time, the government and the private entity, most likely a Chinese company, would have shared the risks of the enterprise from the beginning. Instead, the government shouldered all the risks. The Ex-Im Bank bears none. Whether or not ships come to the port, whether or not it makes any money, their loans get paid. 

In 2016, the Government is in a weak negotiating position. The Government cannot afford not to enter into a transaction. The Chinese can wait. The longer the port remains in its present condition, the loan repayments keep piling up. The needed additional investments can only be done by taking additional loans. None other than the Chinese can make the port successful. There is unlikely to be unfettered competition among Chinese companies to bid for the concession. 

An additional concern is the proposed restriction on new ports. It is actually a good thing to have restrictions that would tie our hands on wasting money on ports like Oluvil. As long as Galle and Trincomalee are shielded, there should be no problem. But Trinco is critical. The central principle of Sri Lankan foreign policy, which includes economic policy, is balance. When China gets a dominant role in Hambantota, it must be balanced with an Indian role, possibly together with Japan, in Trinco.

Entering into a PPP with a Chinese company is the right thing to do. It should be supported. The issues at stake are much larger than the jobs of workers in a port that does not attract ships. The 15,000 acres planned to be given to the Chinese companies is worthy of greater attention. Cheap and plentiful land is Hambantota’s USP. But great care must be taken to minimise friction with the citizens in the area. 

The options one faces, and the negotiating position one has, changes over time.