Sale of Hambantota Port – A fair deal?

Prime Minister Ranil Wickremesinghe at the 15th Asia Pacific Conference in Hong Kong early November informed that Sri Lanka will give 50 sq.km to China Merchant Group for industrialisation. Newspapers reported that the cabinet accepted the swapping of the Hambantota Port debt to equity and the Government will sign the agreement on 8 January, next year. Under the proposal, China Merchant Port Holdings Ltd. (a member of the group) is to acquire 80% of Hambantota equity, valued at $ 1.08 billion and to settle payments in instalments. In addition, the Government hopes to dispose Mattala Airport under a PPA.

But details of the agreement as what extents of Hambantota and Mattala Airport be divested under the loan swap has not been made public, while the media did not question. The writer wishes to discuss the background and possible implications of the deal.

China Merchant Group

The PM’s disclosure in Hong Kong confirmed the long suspected investor be China Merchant Holdings Group (CMHG), a fully Chinese government-owned organisation owning Colombo International Container Terminal Ltd. (CICT), the operator of Colombo South Terminal with a 35-year Build-Operate-Transfer (BOT) agreement. CICT is also the promoter of Colombo Port City. They are also the developers of Hambantota Port.

CMPH won the ‘Global Port Operator of the Year Award – 2016’ and the role played by CMPH in the development of the Port of Colombo into a leading transhipment hub in South Asia was among the factors for the award.

History

The feasibility study for the construction of the Hambantota Port was conducted in 2005 by a Danish consultancy organisation and the proposed west and east breakwaters of length 988m and 312m, 210m wide port access channel, 20m deep port mouth and a port basin of extent 43Ha and 17m depth enabling 100,000DWT ships. The first phase is to consist of two 600m general purpose berths and a 310m long service quay; in addition, a 610m long oil quay, a tank farm with 11 tanks, three tanks for LPG and an administration complex. The total cost of the first phase was estimated to cost $ 360 million, excluding $ 76.5 million for the bunker terminal.

The second phase of the project, including container terminals, is estimated to cost around $ 750 million and the third phase is to include a dockyard. The harbour, when completed, will accommodate 33 vessels at any given time, making it the largest port in South Asia. The new port complex acquired 1500 hectares of land while Colombo Port consists of only 300 hectares.

Construction and opening

The construction of the first phase commenced in January 2008 by China Harbour Engineering Company and Sinohydro Corporation estimated to cost $ 361 million, with 85% funding from China Exim Bank and the balance 15% by SLPA for completion by May 2011, but the incomplete harbour was opened six months ahead in November 2010 to coincide with President Rajapaksa’s birthday. 

To enable the port to be opened the contractor was ordered to remove the cofferdam to connect the port to the sea. The action prevented the contractor from removing rocks near the port mouth, although a small vessel as jetliner could enter. Finally, the contractor had to resort to underwater blasting of rock and Government agreed to pay additional $ 40 million making the project cost reach $ 508 million. The total cost of Stage I, including a tank farm to provide bunkering facilities, roads, flyovers and the 17 storied administration building, cost the country $ 650 million. The launch of the second phase of the port development commenced on the same day.

Second phase

The phase involves the main container berth 838.5m long and 17m deep, multi-purpose berth 838.5m long and 17m deep, two feeder container terminals 460m long and 12m deep, transition berth 208m, new oil terminal 300m and a yard area of 65Ha and an artificial island of 50Ha (by dumping excavated materials) and a 60Ha yard adjacent to the quay wall. The Phase II was estimated to cost around $ 750 million.

The excavation of Phase II was completed, and filling the port basin with sea-water in July 2015 with a simple ceremony attended by Ports and Shipping Minister Arjuna Ranatunga.

Container terminal

When the Chinese President visited Sri Lanka in September 2014, in addition to the Port City, an agreement was entered between China Merchants Holdings Group and SLPA for the development of the Hambantota container terminal with an investment of $ 808 million. The agreement allows the project company to operate two 100,000 DWT container berths and two 10,000 DWT feeder from Phase II for 35 years. But the agreed percentage ownership of SLPA, time period, royalty payment by the Chinese for the facility was not disclosed.

The Chairman’s statement 

After signing the agreement, Chairman SLPA Dr. Bandu Wickrama informed the press that the agreement only covers “the operational part” while SLPA owns the property. The Chinese joint venture will supply container handling equipment and will guarantee revenue to the Ports Authority. The SLPA is not investing money in the project company. “Our capital is the infrastructure we developed; we are not spending an additional cent.”

Hambantota Phase I, although not used for handling containers, consists of two 600m general purpose berths, a 310m bunkering berth and a 120m small craft berth at a depth of 17m. Phase II would avail six berths; thus the total availability at Hambantota would become eight deep-water berths. Meanwhile, Colombo South harbour has provision for nine deep-water berths in South, East and West terminals.

Vehicle Transhipment 

The Hambantota Port came under severe criticism for the inability to put into usage and SLPA decided to divert all vehicle shipments to Hambantota from June 2012. The port’s transhipment operations became popular with Japanese, South Korean and Indian car makers who are transhipping increasing numbers of vehicles through the port.

Bunkering 

A bunkering facility and tank farm was constructed under the Phase 1, located 1.2km away from the waterfront and connected to the oil terminal through a pipeline. The facility consists of 14 tanks with a total storage of 80,000m3. Bunkering operations commenced in June 2014 by SLPA had to be suspended due to heavy losses resulting from “bunkering irregularities”. 

Colombo South harbour

By 2000 Colombo Port possessed three container terminals with seven berths and four feeder berths and the harbour depth was only 13.5m, capable of catering to small carriers. To meet increasing demands, SLPA proposed the Colombo Port Expansion Project. The proposals included construction of breakwaters, increasing harbour depth and construction of terminals. The breakwater was to be built by the SLPA and cargo handling terminals by the private sector. SLPA’s improvement works were expected to cost $ 400 million and the ADB agreed to fund $ 300 million.

Tenders 

International tenders were called in 2006 and the tender for the construction of breakwaters was awarded to the lowest bidder Hyundai Engineering Construction for $ 320m. The tender for the privilege of Colombo South Terminal should have been given to the company making the highest offer, which was Aitken Spence in partnership with the Port of Singapore Authority offering $ 183m. But the Government selected another party for which ADB objected and threatened to withdraw funding, and the Government was forced to cancel both contracts.

After two years, the Government managed to convince the ADB and the tender for the breakwater was awarded to Hyundai who was the lowest tenderer; but at $ 375.1 million, higher by $ 55 m. The construction commenced in April 2008, ADB contributing $ 300 million and SLPA contributing the balance, and was completed in July 2013.

Re-tendering of South Terminal

When tenders were called again in February 2009 for the 35-year BOT deal, China Merchant Holdings (CMH) – Aitken Spence consortium submitted the only bid, but the royalty fees offered in the bid was around 50% received at the first round. SLPA was expecting to repay part of the ADB loan from royalty fees, faced a problem and requested CMH to up their royalty payments. 

No container handling 

in Hambantota

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 the above targets were achieved.

The non-operation of container handling at Hambantota Harbour Stage I is due to the contract agreement for the South Terminal of the Colombo South Harbour signed by China Merchant Holdings with SLPA, including a clause holding up cargo-handling at Hambantota until the South Terminal reached agreed capacity.

CICT commenced construction works of the Colombo South Terminal in December 2011 with an investment of $ 500 million. During the implementation period Aitken Spence withdrew from the consortium and their share could have been bought by SLPA, but were unable due to funding problems. The shares were bought up by CICT increasing the share to 85%. The new terminal commenced operations in August 2013.

In 2015, CICT reached an impressive milestone of handling 1.561 million TEUs. According to the agreement SLPA could have commenced cargo handling operations in Hambantota Phase I. But to handle containers SLPA needs cargo handling facilities.

Meanwhile, in Colombo Port East Container Terminal, SLPA completed the first 440m single berth with a water depth of 18m in May 2015 costing $ 80 million, was officially opened by the Minister Arjuna Ranatunga. However, even to date, the terminal is idling without cranes to handle containers and have called international bidders to operate the terminal.

Mattala Airport

The MRIA, located in a 2,000 Ha property, has a runway 3,500m long and is the only airport in the country capable of receiving the world’s largest passenger aircraft, the Airbus A 380, cost $209 million, with $ 190 million from Exim Bank of China. The airport opened on 18 March, 2013 with the arrival of a Sri Lankan Airlines flight.

Selling Hambantota Port to Chinese

The Government is negotiating with the Chinese to take over $ 1.1 Billion debt in exchange for  80% stake of Hambantota Port, Mattala Airport along with 5,000 Ha or 12,500 acres of land to potential industries, but details are not clear.

With the agreement signed with China Merchant Group (CMG) for the Colombo South Terminal, the Government has no option but to hand over Stage I of Hambantota to the same group. For Stage II of Hambantota, the Government has already signed an agreement to allocate four berths to CMG. The Government is anxious to dispose the assets in lieu of loans, but how about the expenditure already incurred by the country in building the ports. Let’s look at various aspects.

Labour supply

The proposed industrial zone for Chinese investors would be used for assembly of Chinese components and re-export, mainly to India under the Indo–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 the country is already facing an acute shortage of labour for all industries and services in Colombo and urban areas. The Chamber of Construction Industry has already requested permission to import construction labour to supplement shortage.

Actually, labour is not unavailable, they are reluctant to work in factories and demand office work. Meanwhile, numerous government training institutions train thousands of youngsters, but trainees lack quality and are not acceptable to the industry. 

Imported labour

Thus the proposed Chinese factories in Hambantota would have to depend on imported labour. Most probably labour would come from Bangladesh, where workers are prepared to work for $ 175 or Rs. 26,250 per month. Their supervisors and senior management would be Chinese. The industries located in Special Industrial Zones with no local taxes or customs regulations if produce is exported. The factories would assemble imported Chinese components unloaded in the Hambantota Harbour and would be exported under “Made in Sri Lanka” label. China must be impatiently waiting to Sri Lanka to sign ETCA agreement. Will this arrangement help Sri Lanka or provide much needed backward integration with our local industry.

12,500 acres for Industry

Where would the promised 15,000 acres come from? The coastal belt beyond Hambantota is Bundala sanctuary. In the cleared lands around the port, elephants roam; the allocation of land for the prospective industries would sure raise conflicts with the environmentalists.

Mattala Airport

Idling Mattala Airport too has been offered to the Chinese and they probably will be the only party willing to accept. The airport would certainly comply with Chinese plans. With the functioning of Hambantota Harbour and the Industrial Zone, the labour from Bangladesh and China would use Mattala – Dhaka – China route, supply urgent materials and spares, making Mattala a busy airport.

Costs 

Hambantota Port Stage I                 $ 508 million

Phase II     $ 808 million

Total         $ 1,316 million

According to the Government’s offer, China Merchant Port Holdings Ltd. will acquire 80% of Hambantota valued at $ 1.08 billion as their portion of equity and settle payments in instalments. But China Merchant Group is not into airports and Mattala Airport will need another Chinese investor.

Requesting $ 1.08 billion for 80% makes the total investment value be $ 1.35 billion, while as the total costs amount to $ 1,316 Million. Is this the Government calculation or just a coincidence?

Loan payments

In an interview with Sunday Times in May 2015, Chairman SLPA informed the loan from China Exim Bank for Hambantota Port Phase I was $ 350 million at 0.9% plus LIBOR, or around 2% per annum, but with rising costs the allocation was increased to $ 500 million.

The second phase of Hambantota Port will cost $ 808 million. The loan from China Exim Bank in three tranches: The first is $ 600 million at 2% interest; the second is $ 51 million at 4% plus LIBOR; and the third is $ 157 million at a fixed rate of 2%. At the same agreement, original agreement interest rates were revised from around 2% to 6.3% (fixed). By mid 2015, the Government had already drawn $ 500 million in funds for Phase II.

As loan payments the Government paid Rs. 3 billion in January 2015 and another Rs. 4 billion in June 2015. SLPA’s loan commitment for 2016 to for Hambantota stage I and stage II, stand at Rs. 9 billion. 

Expenses by SL

For Hambantota Port Stage I, in addition to the loan, the country incurred other expenses, as consultancy by a Danish firm, acquisitions of land amounting to 1,500 acres, payment of compensation, development of basic infrastructure also the Government has already serviced part of the loan. Also the invaluable location for a port.

In the development of the Stage II China Merchants Group were granted rights to four berths in the port. Does the $ 808 million indicated refer only to basic development and development as a container handling facility be additional? No mention had been made by SLPA.

In comparison, Colombo South Port main break-waters were built with Government funds, berths were offered to operators to be developed and paid the Government a lump sum and a percentage ownership. Is the same procedure being continued?

When Chinese get Hambantota Stage I, with 4 berths of Stage II already agreed, they would control six deep water berths at Hambantota and three deep water berths in Colombo South. The efficiency shown by the operator by winning the ‘Global Port Operator of the Year Award – 2016’ and the proximity of Hambantota to shipping lines, they would improve container handling and will enjoy practical monopoly in Sri Lanka, also Hambantota would offer competition to Singapore as well.

With the sale of Stage I, SLPA’s existing vehicle reshipment market will be controlled by the Chinese. How about the oil terminal already built, but currently idling? What are the terms of offer of 50 sq.km of lands for the industrial state? Chinese are eager to have the harbour, oil terminal, gas storage, power plant to produce electricity, meaning Chinese would be completely independent of their requirements except for water. The Government already announced the intention to give 25-year tax free concessions to Colombo Financial City and investors. Would similar duty and tax concessions apply to proposed industries in Hambantota industrial zones? Are we so bankrupt is the country willing to handover entire Hambantota to China Merchant Port Holdings to cover up some loans and keep only 20%? I am more confused by the lack of discussion or public concerns or the opposition who do not question government actions.