‘HowChinagotSriLankatocoughupaport,”wastheheadlineofawidelyquotedarticlepublishedbyTheNewYorkTimesonJune25,2018.
ThepaperassertedthatSriLankasaid,“Yes,thoughfeasibilitystudiessaidtheportwouldn’twork.Yes,thoughotherfrequentlenderslikeIndiahadrefused.Yes,thoughSriLanka’sdebtwasballooningrapidlyunderMr.Rajapaksa.”
Butaretheseallegationstrueandfair?
Feasibilityandvision
TheSriLankanGovernmenthadlongwantedtobuildaseaportatHambantota,andtwofeasibilitystudieswereundertakenbeforeitembarkedontheambitiousportproject.
Thefirststudywascompletedin2003byCanadianengineeringfirmSNC-Lavalin.However,itwasrejectedbytheministerialtaskforceonthegroundsthatitwasnotbankableandwasincompletesinceitoverlookedthenewport’spotentialimpactonthecountry’smaincommercialportinColombo.
Threeyearslater,Ramboll,aDanishconsultingfirm,undertookasecondfeasibilitystudyandadoptedamoreoptimisticviewforthepotentialofHambantotaPort.Itprojectedthatdryandbulkcargowouldconstitutethemaintrafficfortheportuntil2030.HambantotaPortwasexpectedtohandleapproximately20million20-footequivalentunitsby2040.
OnDecember26,2004,amagnitude9.1earthquake,itsepicenteroffthewestcoastofIndonesia’sSumatraIsland,triggeredaseriesofdeadlytsunamisacrosstheIndianOcean,killinganestimated230,000peoplein14countries.
SriLankawasthesecondhardesthit.Thepowerfulwaveswipedoutentirevillagesandtownshipsonthesouthandeastcoastsoftheislandnation,causing30,000reporteddeaths,damaginghighwaysandrailways,destroyingschoolsandhospitalsandleaving900,000peoplehomeless.
Hambantota,abustlingsoutheasterncoastaltownknownforitssaltproduction,wascompletelydevastated.
ThetownisalsohometoMahindaRajapaksa,thesixthpresidentofSriLanka,andishiselectoraldistrict.AftercomingtopowerinNovember2005,hewastednotimeinlaunchingseveralbig-ticketinfrastructureprojectstorevitalizetheeconomyofhishometown.HambantotaPort,aprojectfirstmootedbyhisfather,wasoneofthem.
InabriefpublishedinApril2018,theCenterforStrategicandInternationalStudies,aninfluentialU.S.thinktank,affirmedthatHambantotaPortwasnotaChina-initiatedproject.Infact,HambantotaPortwasconstructedlongbeforetheBeltandRoadInitiativewaslaunchedin2013.
IndiawasthefirstcountryRajapaksaturnedtoforfinancialhelptobuildtheHambantotaPort.However,hisrequestwasrejectedasIndiadeemedtheprojecteconomicallyunviable.Themultilateraldevelopmentbanks(MDBs),werealsounwillingtolendtheirsupporttotheproject.
ChinasawthepotentialofHambantotaPort,whichsitsstrategicallyamere10nauticalmilesnorthofthebusyIndianOceaninternationalshippingroute.ItnotonlymeetsthelogisticalneedsofChina’sburgeoningglobaltrade,butalsoservesasatransshipmenthubandsupplybaseprovidingbunkeringfacilitiestothelargenumberofvesselsplyingoneofthebusiestshippingroutesintheworld.India’srelaxationofitscabotagerulesinMaygreatlyenhancedHambantota’sstatusasthetransshipmentportforgoodsdestinedforthesubcontinent.
TheExport-ImportBankofChina(ChinaEximBank)eventuallyagreedtofund85percentofHambantotaPort’sPhaseOneconstructioncostsafterextensivenegotiation.The15-yearcommercialloanof$306millioncarriedaninterestrateof6.3percentwithafour-yearmoratorium.
“TheSriLankanteamdidtrytoseekapreferentialloanfromChina,butthequotaforChina’spreferentialloansthentoSriLankahadbeenusedfortheNorochcholaiCoalPowerPlantandotherprojects,”aleadingSriLankanfinancialexpertexplainedinaXinhuaNewsAgencyreportin2015.
SriLankawasgiventwooptionsfortheinterestontheloan:a6.3percentfixedrateorafloatingratepeggedtotheLondonInterbankOfferedRate,whichwasover5percentthenandtrendinghigher.InOctober2007,SriLankaissuedaFitchBBrated,5-yearsovereignbondat8.25percent,anunsurprisingmoveforanationthatwasstillmiredinaprolongedcivilwarwithTamilseparatists.
ChinaEximBanklaterprovidedadditionalloanstotaling$900milliontofinancePhaseTwooftheHambantotaPortprojectat2-percentinterest,apreferentialrateenjoyedby77percentofChineseloanstoSriLanka.
Openinglosses
ConstructionworkforPhaseOneofHambantotaPort,undertakenjointlybytheChinaHarbourEngineeringCo.andSinohydroCorp.,commencedinJanuary2008.TheportbecameoperationalonNovember18,2010,fivemonthsaheadofschedule.
However,HambantotaPortwasunabletogeneratesufficientrevenuetomeetitsloanobligationsduetoinadequategovernance,lackofcommercialandindustrialactivitiesanditsinabilitytoattractpassingvesselstodockattheport.Bytheendof2016,itsufferedatotallossof$304million.
AmidmountingpressuretomeettheInternationalMonetaryFund’sbailouttermsandloanrepaymentobligations,theSriLankanGovernmentstruckapublic-privatepartnership(PPP)dealwithChinainJuly2017,givingmajoritycontrolofHambantotaPorttoChinaMerchantsPortHoldings(CMPH),whichislistedontheHongKongStockExchange(HKSE).TheHambantotaPortinSriLankaonFebruary8,2017XINHUAAccordingtothefilingmadebyCMPHtotheHKSE,thetermsoftheconcessionagreementrelatedtoHambantotaPortwereasfollows:CMPHwouldmakeaninvestmentof$1.12billioninSriLanka,outofwhich$974millionwouldbeusedfortheacquisitionof85percentofsharesintheHambantotaInternationalPortGroup(HIPG),acompanywhichwasgranteda99-yeartermbytheSriLankanGovernmenttodevelop,manageandoperateHambantotaPortvaluedat$1.4billion.
HIPGwouldacquire58percentofHambantotaInternationalPortServices(HIPS),whichhadbeengiventheexclusiverightstodevelop,manageandoperatetheCommonUserFacilityofHambantotaPort.
TheSriLankaPortAuthority(SLPA)wouldhold15percentand42percentequityinterestinHIPGandHIPS,respectively.
Theremaining$146millionwouldbedepositedinCMPH’sSriLankabankaccountforthepurposeoffuturedevelopmentoftheportandmarine-relatedactivities.
Within10yearsfromtheeffectivedateoftheconcessionagreement,SLPAhastherighttobuyback20percentsharesofHIPGonmutuallyagreeduponterms.
After70years,SLPAcouldacquireCMPH’sentireshareholdingsinHIPGatafairvaluetobedeterminedbythevaluersappointedbybothparties.
Onexpiryof80years,SLPAcouldbuyupCMPH’sshareholdingsinHIPGfor$1,leavingCMPHwith40percentshareholdingsinHIPH.
After99years,CMPHwouldtransferallitsshareholdingsinHIPGandHIPStotheSriLankanGovernmentandSLPAatthetokenpriceof$1uponterminationoftheagreement.
TheconcessionagreementwentintoeffectonDecember9,2017.
Toincreaseindustrialandcommercialactivitiesattheport,Chinafurtherundertooktodevelopa50squarekmeconomiczoneandbuildaliquefiednaturalgasplantaswellasatouristdockyard.Chinawillalsoinvestbetween$400millionto$600milliontodevelopPhaseThreeofHambantotaPortwhichisexpectedtobecompletedby2021.
ThePPPthusrepresentsnotadebtequityswapbutfreshinvestmentbyCMPHamountingto$1.12billion.TheloantakenbySLPAfortheconstructionofHambantotaPortwastransferredtoSriLanka’streasury.CMPH’sinvestmentinHIPGwillbedisbursedinthreetranchesof$292million,$97millionand$584million,withthebalanceof$146milliontobedepositedinCMPH’sSriLankabankaccountforfutureuse.
Alessonlearned
SriLankahadadream,itsgovernmenthadavision:toturnstrategicallylocatedHambantotaintooneofthebusiestportsintheworld.
Whenitsneighborturneditsback,whentheMDBswerecoldtotheproject,ChinaprovidedthefundingandbuiltHambantotaPortwithgoodintentions.
However,asthedreamturnedsour,Chinagottheblame.Thestorylinewastwisted.Hambantotabecametheoft-citedcaseofa“debttrap”undertheBeltandRoadInitiative.ChinawasaccusedoftwistingSriLanka’sarm“tocoughupaport.”
InHambantotathereisalessonthatChinamustlearn:BeltandRoadprojectsmustbetransparent.Theperceptionoftheworldisjustasimportantastheoriginalintention.
AccordingtoarecentreportbytheFinancialTimes,“China’sdevelopmentbanks—thebiggestlendersinthesectorworldwide—arerampingupcooperationwithoverseasfinancialinstitutionsafterproblemswithinternationalinvestmentprojects.”
China’sDevelopmentBankisnow“consideringcombiningitslendingeffortswithWesternfinancialinstitutionsthatrequireadherenceto‘internationalstandards’—includingopen,competitivetendersforprojectcontractsaswellaspublicstudiesonenvironmentalandsocialimpacts,”thepaperhighlighted.
TheauthoristheDirectorofChinaBeltandRoadDesk,BakerTillyMHAdvisorySdnBhd,Malaysia.ThestorywasfirstpublishedonCnfocusCopyeditedbyLaurenceCoultonCommentsto