Handing over Hambantota to the Chinese on a platter!

The Prime Minister’s four-day official visit to China in early April was meant to clear misunderstandings resulting from the suspension of Port City Project, so that Sri Lanka could sort out relationships and adjust payments due on loans obtained from China, and in addition to obtain much needed financial assistance. 

The discussions with the Chinese Prime Minister and the President reached a broad framework for the agreement, but details need to be worked out between the officials of the two countries. The Chinese called for enhanced cooperation in construction of ports, airports, roads, railways and in the fields of finance, science and technology, and culture.

The Government is preoccupied with the $125 million Chinese claim over Port City and repayment of loans obtained; the country is facing the danger of handing over Hambantota to the Chinese on a platter

Agreements

Sri Lanka agreed for the recommencement of Port City Project with immediate effect and the Chinese reciprocated with an outright grant of 500 million Yuan ($ 77.2 million). The Ministers accompanying the Prime Minister signed a number of agreements with their Chinese counterparts. Minister Malik Samarawickrama signed a MoU on promoting investment, economic and technical cooperation. 

Foreign Minister Mangala Samaraweera signed the treaty on extradition. Central Bank Governor Arjuna Mahendran signed the Comprehensive Cooperation agreement between China Development Bank and the Monetary Board of the Central Bank. Prof. Sirimali Fernando, on behalf of National Science Foundation, signed an agreement with the China National Science Foundation for research funding. Karunasena Kodituwakku, Sri Lankan Ambassador to China, signed for a kidney mobile screening vehicle project between China and Sri Lanka. In addition, the SL-PM appointed a three-member committee to ensure all Chinese investments and projects in Sri Lanka are methodically facilitated and expedited.

Chinese Foreign Ministry Spokesperson Lu Kang called on both sides to speed up the negotiations on the second phase of the Hambantota Port in order to enable Sri Lanka to utilise its geophysical advantage to become an important international logistic hub.

Financial Centre and Yuan loans

The PM informed of the proposal to establish an International Financial Centre in Colombo, located within the Port City. The legal framework for the administration of the Financial Centre would make the Centre the financial and business hub not only in Sri Lanka, but in the whole Indian Ocean region.

According to the Comprehensive Cooperation agreement between two Central Banks, the Chinese Yuan will be made a convertible currency in Sri Lanka soon after the China Bank sets up operations in Colombo. With this move, Chinese Yuan will have the same status as the US Dollar. The move will enable Sri Lanka to have more interactions with China, financially, in terms of soft loans and other short and mid-term financial measures.

Free Trade Agreement

Chinese and Sri Lankan Prime Ministers agreed to further advance Free Trade Agreement (FTA) talks between the two countries. The Chinese Prime Minister Li Keqiang is expected to visit Sri Lanka next year and the FTA agreement would be signed during this visit.

A Minister who visited China informed that “FTA with China will be different from the FTA with India. Hopefully it will not be based on quotas, but boost preferential trade. If we don’t look outwards, and develop trade partnerships, the country can never be developed. Therefore, we will further improve our diplomatic relations and trade and investment ties not only with China but also with India, Japan, Europe, America and the rest of the world.”

Chinese requirements

The Chinese Premier wished to speed up negotiation of the second phase of the Hambantota port project. China will develop industrial capacity cooperation with Sri Lanka for its plan to build an economic zone and help speed up the construction of infrastructure as well as its industrialisation process. The Chinese Government will encourage domestic enterprises to invest in Sri Lanka’s construction of port, industrial parks, special economic zones and its manufacturing industry.

In the joint statement released in Beijing after the Prime Minister’s visit, China has called on both sides to improve legal environment to facilitate pragmatic cooperation and consolidate the traditional friendship and Sri Lanka pledged to create a better environment for Chinese investors.

Sri Lanka financial situation

The country with $ 8 billion project and other loans obtained from China is going through an extremely difficult period financially. The Government is negotiating funds from IMF who would impose conditions to improve financial management, but the support extended is much lower than expectations, forcing the government to look for every possible source. Under the circumstances China appears to be the most attractive option. However, after the Port City issue, Chinese assistance would require better commitments from Sri Lanka.

Government expectations

During the discussions the two parties agreed to recommence Port City, more projects to be awarded to Chinese companies, and increased Chinese investments, releasing 1,000 acres for an industrial park in Hambantota. The PM has promised to protect the lawful rights and interests of Chinese companies in line with its law and foster a sound environment for Chinese investors.

Sri Lanka has requested China to swap some of the $8 billion it owns for equity in infrastructure projects becoming public-private partnerships, in which part of the debt would become equity held by Chinese companies. In addition, Sri Lanka is offering Chinese companies to invest in State-Owned Enterprises, with a view of taking over part of equity. 

But no headway has been made on highly publicised claims about renegotiating debt. Attempts to swap debt to equity also failed, though Chinese firms have expressed willingness to take over some operating business along with their debt.

The lessons learnt

Although Sri Lanka snubbed China by suspending the Port City commenced by their President, the Chinese acted in an extremely mature manner to initiate the relationships forward, possibly with their ulterior motives of Silk Road and dominance of the Indian Ocean. China is prepared to help Sri Lanka, but the country needs to be extremely vigilant to obtain best solutions to the country’s problems.

In the past the country messed up large number of projects due to politicians taking decisions that should have been taken by professionals. The Katunayake Expressway which was originally proposed overland was diverted over Muthurajawela marshes, causing costs to escalate from Rs.5.5 billion to Rs.50 billion. 

The profit-making SriLankan Airways was taken over from the control of Emirates and political bungling is dragging the country to bankruptcy. In the construction of Colombo South Port, attempts to award tenders to political favourites was prevented by ADB, but the resulting delays and re-tendering cost the country nearly $200 million and delayed the project by nearly three years.

The Port City project was suspended claiming inadequacies of the environment report, but under the agreement the environmental approval was the responsibility of the Sri Lankan Government. The fact should have been brought to the notice of the leaders, or they were blind to the facts. The construction of Kandy Expressway became financially unviable when politicians re-aligned the most trafficked road in the country extending the length by 34kms.

Past projects

Phase I of Hambantota Harbour commenced in January 2008 and the incomplete harbour was officially opened on 15th November 2010 and subsequently completed. The 17m deep harbour is capable of handling large container ships, but was unused receiving severe criticism, and SLPA decided to divert all vehicle shipments to the Hambantota Port from June 2012. The total cost of Stage I, including the 17-storeyed administration building, cost the country $650 million.

No container handling in Hambantota

When bids were called for the operation of Colombo South Port, South terminal in June 2007, five bids were received; however, the Government cancelled the entire tender process. When tenders were called again in February 2009, China Merchant Holdings (CMH) submitted the only bid, but the royalty fees offered in the bid was around 50% received at the first round of bids. The SLPA requested CMH to up their royalty payment to enable SLPA to repay the loans.

In the subsequent negotiations, SLPA guaranteed a minimum volume of 1.5 million TEUs per annum at the initial stages, two million TEUs after 10 years and 2.4 million TEUs after 20 years. To achieve same, SLPA agreed not to allow container handling in Hambantota until above targets were achieved. It was this condition that prevented Hambantota harbour from handling container cargo.

Hambantota Phase II

The launch of the second phase of the port development commenced on the ceremonial opening day of Phase I. The excavation of Phase II basin has been completed, and the filling of the port basin with seawater began in July 2015. With the filling of the basin, the 110-metre-long cofferdam separating Phase I and II was to be removed, opening Phase II to the sea. The Phase II was estimated to cost around $750 million.

When the Chinese President visited Sri Lanka in September 2014, an agreement was entered between China Merchants Holdings (International) Company and China Harbour Engineering Company Ltd. (the Project Company) with SLPA for the development of Hambantota container terminal with an investment of $808 million. The agreement allows the Project Company to operate four berths from Phase II. But the agreed percentage ownership of SLPA and the royalty payment by the Chinese for the facility was not disclosed.

Chinese interest on Phase II

At the Prime Minister’s visit to China, the Chinese Prime Minister showed great interest in the Hambantota second phase, being developed under Chinese funding. The project involves Main container berth of length 838.5m and 17m deep, multipurpose berth 838.5m/-17m, Feeder container terminal 460m long/12m deep, transition berth 208m, new oil terminal 300m and a yard area of 65Ha.

Thus total facilities available in Phase II is more extensive than the four berths agreed to the Chinese Project Company. Indications are that Chinese are interested in the entire facility and SL would be interested in covering loan payments due for the development of Phases I and II, the details of which would have to be negotiated.

Sri Lanka is offering a 1,000 acre industrial zone for Chinese investors in Hambantota, which would be used by China to add value to Chinese components and re-export mainly to India, under the India-Sri Lanka trade agreement. New industries would provide employment opportunities to local labour and transfer of skills, helping to achieve PM’s ambitious one million jobs. But availability of labour in the sparsely populated region is doubtful, and the Chamber of Construction Industry has already requested permission to import construction labour to supplement shortage.

Kandy Expressway – history

In November 2014, the former President Mahinda Rajapaksa launched the construction of the Kandy expressway. The proposed road was to have interchanges at Gampaha, Veyangoda, Mirigama, Nakalgamuwa, Pothuhera, Dambokka, Kurunegala, Rideegama and Melsiripura making the total distance from Enderamulla to Kandy as 120km. The construction of sections of the highway was offered to a number of contractors and they mobilised and purchased equipment, some of which were specialised for the project. However, the new Government halted the project.

Previously, in May 2011 the same highway was offered to international investors, to be built as a privately financed toll road on BOT (build, own & transfer) basis. The investors was expected to design the road over the pre-selected corridor, acquire land, pay compensation and construct related facilities.

In July 2012, the construction of the Kandy Expressway was awarded to two Chinese companies, China Merchant Holdings and China Merchant Huajin Investment Company. The construction of the first phase of about 48km was expected to begin in August under BOT system. The feasibility study was completed and the MoU was signed. However, the project was halted by the President when some persons affected by acquisitions protested and the route was diverted. The modified route is 34kms longer; in addition, the route passes over paddy fields and marshes requiring over 10kms of viaducts (elevated roads) massively increasing costs and the contractors were no longer interested.

Investment possibilities

Sri Lanka is seeking more investments in the future. In addition to the 1,000 acre industrial zone, an oil refinery in Hambantota is also a possibility. A Liquefied Natural Gas (LNG) power plant in Hambantota is also on the cards. China’s Cosco Shipyard has already done a feasibility study in building a dockyard in Hambantota, but no investment has yet been made.

Other possible projects are construction of number of Expressways to Kandy, Jaffna and to Pelmadulla via Ratnapura possibly on BOT basis. Also, Sri Lanka is interested in joint collaboration of State-owned projects such as Mattala airport, which was opened in March 2013 costing $209 million with $190m Chinese loan.

Indian concerns

The envisaged special treatment to Chinese would raise Indian concerns, and to pacify India the country would need to expedite ETCA and encourage Indian investments. The proposed Sampur power plant now targeted for 2021 may never materialise, considering need to use of locally available gas. In Colombo Port, East Terminal could be offered to Indian investors, especially considering 80% of containers handled in Colombo are to-or-from India.

Way forward

The country’s road network, urban as well as long distance are congested and needs improvement. A series of expressways are planned for long distance, while the Megapolis plan proposes two ring roads around Colombo as Outer and Inner Necklaces, which would allow Rapid-Bus-Transport service for passengers, reducing the need to use private vehicles. But the proposed necklaces would require a minimum six lane width (a bus lane and two vehicle lanes either way) which would require a wide corridor at ground level. The ring roads and expressways would be expensive to build.

Politicians should confine themselves to policy decisions and allow technocrats to work out details for a least cost solution. We need to understand that every proposal would be protested by some group and their reasonable grievances could be addressed without derailing the project.

To address public concerns, in future projects details should be informed to the people, preferably over the internet, and comments and reasonable concerns be addressed, balancing concerns with cost. The last Government had a policy of avoiding demolition of housing, and highways were located over paddy lands and marshes. Elevated roads over marshes cost over six times that of overland. Thus locating roads overland on sparsely populated regions and relocating affected persons would be cheaper.

The expressways built on BOT basis would be best for the country, considering the financial constraints. Identify a road corridor 500m width (say), and allow the developer to select the final route. If the relocation of the affected persons are the responsibility of the developer, he would balance the costs of construction vs. relocation and achieve lowest cost.

In the award of contracts on BOT basis, the period of contract, rates chargeable and future price increases need to be agreed upon. Currently, the charges under highways vary: Southern Expressway charges Rs.550 from Kottawa to Godagama for 126km or Rs.4.36 per km, Katunayake Expressway charges Rs.300 for 25.8km or Rs.11.62 per km.

Chinese have indicated their willingness to actively engage in local projects and could be invited to do so, along with India and other willing countries. But each project need to be negotiated for the best terms for the country, which did not happen in the past. The Government is preoccupied with the $125 million Chinese claim over Port City and repayment of loans obtained, the country is facing the danger of handing over Hambantota to the Chinese on a platter.