Chinese Name: 汉班托塔港
Location: Hambantota District, Southern Province, Sri Lanka
Type of Project: Logistics; industrial.
Project Developer(s): Sri Lanka Ports Authority (SLPA); China Merchants Port Holdings Company Limited (CMPort), a subsidiary of China Merchants Group; Fujian Transportation Maritime Silk Road Investment and Management Company Limited (Fujian TMSR), an affiliate of Fujian Provincial Communication Transportation Group.
Main Contractor(s): China Harbour Engineering Company (CHEC), a subsidiary of China Communications Construction Company Limited.
Financier: Export–Import Bank of China (China Eximbank).
Cost: 1.3 billion USD (Phase I: 508 million USD; Phase II: 808 million USD).
Project Status: Operational
Developing Hambantota as a second seaport after the main port in Colombo has been part of the Sri Lankan Government’s development plan since at least the early 2000s. Located in Southern Province, Hambantota is approximately 10 nautical miles from the main maritime route linking the Asia-Pacific with Europe and North America. The port also enjoys short transit times to India, Africa, and the Upper Gulf, which gives it easy access to the expanding markets of the Indian Subcontinent. By developing the project, the Sri Lankan authorities hope to boost the economic development of Southern Province—the poorest in the country.
In June 2002, the Sri Lanka Ports Authority (SLPA) signed an agreement with the Canada-based SNC Lavalin International to conduct a feasibility study for developing a port in Hambantota. Conducted in 2003 and partially funded by the Canadian International Development Agency, the study concluded that building a port was feasible and recommended the project be developed on a build–own–operate–transfer model through a joint venture between the SLPA and a private company. However, a steering committee of the SLPA decided in December 2003 that the project was unbankable, on the grounds that the feasibility study was not comprehensive and the company had failed to conduct primary research, instead relying on existing information. The following year, the Sri Lankan Government commissioned Danish company Ramboll to undertake a second feasibility study, which was completed in 2007.
In 2004, Sri Lanka was hit by the powerful Indian Ocean tsunami, which killed more than 30,000 people and left another 900,000 homeless. As part of the post-tsunami reconstruction plan, investment to develop a port in Hambantota was included in a 2005 government plan that laid out a 10-year development framework for the 2006–16 period. In 2005, Sri Lanka elected as President Mahinda Rajapaksa, a long-time member of the Sri Lankan Parliament representing the Hambantota District, whose father, D.A. Rajapaksa, another prominent politician, had first proposed the idea of a port in Hambantota. The younger Rajapaksa had been pushing for the project ever since he became the Minister of Fishing and Aquatic Resources Development in 2000.
Before the Ramboll feasibility study was completed in 2007, the Sri Lankan Government was already involving Chinese companies in the project. In October 2006, the SLPA signed a memorandum of understanding (MoU) ‘concerning the detailed design works of Hambantota Port Development Project (Phase I)’ with a Chinese consortium comprising China Harbour Engineering Company (CHEC) and Sinohydro Corporation Limited. The Chinese Government also agreed to ‘look into the possibility of providing the required technical assistance and concessionary funding’ for the project. From February to March 2007, President Rajapaksa visited China, during which time the Hambantota project was discussed. According to the joint communiqué released by the two governments at the end of the visit, ‘Chinese companies [had] already started discussion with the Sri Lankan owner regarding the Hambantota development zone, including the port construction, oil storage zone, and fuelling facilities’, and the Chinese Government would ‘encourage and push relevant financial institutions to assess the feasibility study of these projects’.
A few days after the visit, CHEC, a major maritime infrastructure company and subsidiary of the state-owned China Communications Construction Company, signed the construction contract for Phase I of the project with the SLPA in Sri Lanka’s presidential office in Colombo. Construction commenced in October 2007. The contract was worth 361 million USD, but the actual cost of Phase I increased to 508 million USD by the time it was completed. According to the SLPAp. 155, two loans were obtained from China Eximbank for Phase I, including a commercial loan of 307 million USD at a fixed rate of 6.3% and a government concessional loan of 960 million RMB (equivalent to 141 million USD) at a rate of 2% (see Table 1 below). Even though President Rajapaksa had initially sought a larger concessional loan, China’s quota for concessional loans to Sri Lanka had been exhausted by other projects. According to China’s official Xinhua news agency, the fixed rate of 6.3% for the commercial loan was chosen by the Sri Lanka Government over the alternative of a floating rate based on the London Interbank Offered Rate (LIBOR). But according to a 2018 statement by then former president Rajapaksa, Sri Lanka renegotiated the interest structure to a fixed rate after the floating rate it had initially chosen began to rise too high.
CHEC first entered Sri Lanka in 1998 when the country was still mired in the civil war that lasted from 1983 to 2009. In the following decade, the company took on a number of local projects, including the national A5 expressway, which later featured on the country’s 1,000-rupee bill. CHEC participated in rescues after the 2004 tsunami using its construction equipment, and helped restore three fishing ports in the post-tsunami reconstruction. According to the company, in early 2007, it assisted the Sri Lankan Government with the preliminary feasibility study for the Hambantota port, including estimating the economic viability of the project, as well as geological prospecting, and assessment of the environmental impact. Phase I of the Hambantota port was completed in 2012, but by December 2010, CHEC had already signed an ‘engineering, procurement, and construction’ contract for Phase II. The total cost of Phase II was initially estimated to be 808 million USDp. 40,which was later raised to 885 million USD. It was again funded by a mix of three commercial and preferential loans from China Eximbank. These included a 600 million USD loan with a preferential interest rate of 2%, a 65 million USD loan with a commercial interest rate of 6.5%, and a 1 billion RMB (approximately 143 million USD) government concessional loan with an interest rate of 2%. Together with the two loans for Phase I, between 2007 and 2014, five loans were obtained from China Eximbank to finance various parts of the project.
Table 1 Loans from China Eximbank
While the Phase II construction of Hambantota Port was under way, the Sri Lankan Government was already preparing for its operation. In September 2014, China Merchants Holdings (International) Company Limited, the international investment arm of China Merchants Group (CMG), a Hong Kong–based Chinese state-owned enterprise, formed a joint venture with CHEC, and signed a lease agreement with the SLPA to ‘supply, operate, and transfer’ (SOT). CMG had also been active in Sri Lanka for some years. Its subsidiary China Merchants Port Holdings Company Limited (CMPort), for example, had invested in Sri Lanka’s Colombo International Container Terminal in 2011. The SOT agreement had a concession period of 35 years, extendable by five years, under which the SLPA and the Chinese joint venture would make a capital investment of 601 million USD, with a contribution of 391 million USD from the latter (64.98% of the total). The signing of this agreement was witnessed by both President Rajapaksa and Chinese President Xi Jinping.
However, by this time, Sri Lanka’s political environment was also changing. In January 2015, President Rajapaksa lost his bid for reelection for a third term, and the new President, Maithripala Sirisena, started to challenge many of the infrastructure projects initiated during his predecessor’s tenure, including Hambantota Port. The new government demanded that China Eximbank restructure the loans for Hambantota and ruled that the 2014 SOT agreement had no legal basis. According to a 2017 statement by Sri Lanka’s Ministry of Development Strategies and International Trade, this agreement later became invalid because ‘the conditions were not met’. In spite of the political turmoil, in 2016, the newly elected Sri Lankan Government continued to work with the Chinese Government to study the possibility of operating Hambantota under a public–private partnership, according to the SLPA’s 2016 annual report.
Starting in 2015, Sri Lanka was facing a balance-of-payments problem due to the pick up in non-energy imports, negative export growth, flat growth in remittances, a foreign exit from government securities, lower foreign direct investment inflows, and slow implementation of externally financed investments. This put Sri Lanka in a difficult position paying off its external debts, including the 5.7 billion USD of international sovereign bonds maturing between 2019 and 2023. Sri Lanka had to go to the International Monetary Fund (IMF) in June for emergency funding. A 2017 MoU with the IMF stated that any proceeds from the commercialisation of non-strategic public assets (cash receipts from the sale or lease of publicly held assets to non-residents) would be earmarked for debt service over the medium term, including the maturing international sovereign bonds starting in 2019.
In this context, according to Minister of Ports and Shipping Mahinda Samarasinghe, the Prime Minister suggested to the Chinese leadership that they reschedule or delay the payment, but his request was refused, as China did not want to set a precedent. The Chinese Government instead agreed to help Sri Lanka find an investor. Given the urgency of the situation, the Sri Lankan Government decided to negotiate directly with the interested Chinese companies ‘nominated by the Government of China through the Embassy of Colombo’, instead of making a global call for proposals or even just among Chinese companies, according to a 2018 statement by the Sri Lankan Ministry of Development Strategies and International Trade.
By October 2016, the Sri Lankan Government was already reported to have decided to reenter an agreement with CMG, the original partner of the 2014 lease agreement, with revised terms and transferring 80% of the shares of the port to the latter. Although debates about whether such a deal would be fair for Sri Lanka were already taking place, the final agreement was not reached until July 2017. According to the stock exchange disclosure of CMPort, two companies would be set up, the Hambantota International Port Group (HIPG) and Hambantota International Port Services (HIPS), with each granted ‘the sole and exclusive right to develop, operate, and manage’ the Hambantota Port and the common user facilities, respectively. CMPort would invest up to 1.12 billion USD, including 974 million USD to acquire 85% of the shares of HIPG and 146 million USD for 58% of the shares of HIPS. The SLPA would hold the remaining 15% and 42% of the two companies. The concession period would be 99 years with the possibility of earlier termination based on the terms set out in the contract. The agreement also stipulated that, if the SLPA showed interest in purchasing any shares in HIPG within 10 years, CMPort would divest a maximum of 20% of the shares. After 70 years, SLPA will have the right to purchase all the shares that CMPort holds in HIPG; but if the SLPA does not exercise that right, after the concession period reaches the eighty-first year, the SLPA will have the right to purchase CMPort’s share in HIPG for a nominal value of 1 USD, while leaving a 40% shareholding to CMPort.
According to former president Rajapaksa, contrary to what an influential report by The New York Times suggested, the 1.12 billion USD investment from CMPort was not used to pay off the debt owed to China, which remained to be serviced, but rather was used for day-to-day government expenditure. Other sources suggest the immediate repayment pressure came from the international sovereign bonds, rather than the loans for the port. However, in its attempt to justify the arrangement, the Sri Lankan Ministry of Development Strategies and International Trade stated that, while the agreement was not a debt–equity swap, which was not permitted under Chinese law, it had the characteristics of such ‘while providing greater flexibility for the way in which the government of Sri Lanka can utilize the proceeds generated by the proposed transaction’. According to the IMF, the proceeds from commercialising public assets (sale/lease of public assets) would be earmarked for debt servicing, including of the international sovereign bonds that would mature starting in 2019. The Central Bank of Sri Lanka has stated that some progress has been made in this regard since the implementation of the concession agreement at the end of 2017.
In Hambantota, CMPort plans to implement the ‘port + park + city’ model that its parent company, CMG, has successfully implemented in several of China’s port cities. CMG introduced this model—which integrates port development with industrial parks and urbanisation projects—to Sri Lankan Prime Minister Ranil Wickremesinghe when he visited the company’s Shenzhen base in August 2016.
According to Sri Lanka’s Ministry of Development Strategies and International Trade, the Chinese Government ‘made a separate request from the Sri Lankan government to provide them with 15,000 acres [6,700 hectares] for the activities related to the proposed industrial zones’. Local concerns about the loss of farmland from such a development led to several protests (see the section on the project’s impacts below). Though it is not clear whether the Sri Lankan Government reached any agreement with CMPort or any other Chinese entity regarding the 6,700 hectares of land, in January 2017, an industrial zone located within the 1,200 acres (486 hectares) of land owned by the Port of Hambantota was inaugurated by Prime Minister Wickremesinghe and the Chinese Ambassador to Sri Lanka. The Chinese Ambassador envisaged the zone bringing in 5 billion USD in investment from China and creating 100,000 jobs in the next two to five years—a prediction that, at the time of writing in August 2021, looks unlikely to materialise. In November 2017, the Sri Lanka–China Logistics and Industrial Zone Office was opened in Hambantota. According to the Chinese Embassy in Sri Lanka, this zone has a planned area of 50 square kilometres.
In June 2020, CMPort entered an agreement with Fujian Transportation Maritime Silk Road Investment and Management Company Limited (Fujian TMSR), a Hong Kong–based affiliate of Fujian Provincial Communication Transportation Group, a state-owned enterprise in the eponymous Chinese province. Fujian TMSR will acquire 23.5% of the CMPort subsidiary that holds the 85% of HIPG’s shares, with 268 million USD. CMPort stated such a move would help ‘maintain the management control of HIPG while [lowering its] share ratio by introducing strategic investors to optimise the company’s assets and corporate governance structure’.
In February 2021, the Sri Lankan Foreign Affairs Minister, Dinesh Gunawardena—now in a Cabinet with former president Rajapaksa as Prime Minister—told local media the previous, Wickremesinghe government had ‘made a mistake’ in setting the lease term for Hambantota Port to be extendable by another 99 years. In response to questions about this, a spokesperson with the Chinese Foreign Ministry simply stated that the concession agreement on the Hambantota Port was ‘a mutually beneficial one reached through friendly consultations on an equal-footed and voluntary basis’. The Sri Lankan Ambassador to China denied any renegotiation with China regarding the Hambantota Port in a March 2021 interview.
Proponents of the project have long touted the strategic location of Hambantota as a prime spot for a major port. It is seen as a vehicle for catalysing broader development of Hambantota, and a masterplan has been developed for attracting export-oriented industries to the surrounding area. The project has generated employment and, as of 2019, the HIPG claimed to directly employ more than 900 people, 90% of whom were Sri Lankan, with half coming from Southern Province. It also claimed to have generated 2,000 jobs indirectly.
Despite the promise of employment, there has been conflict with workers. In 2016, leading up to the signing of the lease agreement with the Chinese developer, port workers protesting the port’s privatisation blocked two merchant ships from leaving for several days using heavy machinery and cranes. The action ended only after the Navy was deployed. In 2017, trade unions organised protests and a hunger strike after workers lost their jobs. According to media reports, more than 430 people lost their jobs, and the strike was only called off when an agreement was reached to reinstate 138 people and compensate the remaining workers.
During the time the Sri Lankan Government was negotiating with the Chinese company for the investment deal in 2016–17, several protests broke out, mainly against the proposed lease of 6,700 hectares of land to Chinese entities for the development of an industrial zone. The Third Pole reported local concerns that the lease of the 6,700 hectares in the village of Beragama, close to the port, would claim some of the area’s most fertile land. Reuters reported that local people had been moved to the area during the colonial period to farm the fertile land and now feared being moved out of those same lands by a new development scheme. In response to local concerns, former president Rajapaksa reportedly told the Chinese ambassador that the developer should first focus on developing the port zone, rather than acquiring land in existing agricultural areas.
Reports indicate that several such protests were countered with violence from government supporters. In one protest in January 2017, at least 21 people were injured in clashes between government supporters and villagers. Police used tear gas to break up the clashes, which occurred while the Prime Minister and China’s Ambassador to Sri Lanka were attending the opening ceremony for the Hambantota industrial zone. The government dismissed the protests as being organised by the political opposition—ironically led by former president Rajapaksa, who had been the one to push for Hambantota Port to be built in the first place but was now criticising the land lease for the industrial zone. A Chinese Foreign Ministry spokesperson commented on the protests, saying: ‘[The] small-scale protest that took place recently was a result of local people’s misunderstanding of the policies of the Hambantota Port project.’
There have also been reports of concerns about the environmental impacts of the port and associated developments. According to local NGOs, the project caused the destruction of the Karagan Levava Lagoon, which served as an important wetland refuge for migratory birds, but was heavily dredged as part of the development process. The port is less than 40 kilometres from Bundala National Park, the country’s first Ramsar site (places that are selected on ‘account of their international significance in terms of ecology, botany, zoology, limnology, or hydrology’ under the Ramsar Convention). It is also close to an active elephant corridor. The Mattala Rajapaksa International Airport—famously known as ‘the world’s emptiest airport’—was connected to the port via a highway that cut through sensitive wildlife areas. According to a local environmental group, the Center for Environmental Justice, more than 400 elephants use the corridor, with 15–20% of the local elephant population living in the project area. The group raised concerns that the port’s environmental impact assessment did not adequately assess the project’s potential impacts on wildlife.
Hambantota Port attracted widespread attention from the international media in 2017, following the concession agreement reached between the Sri Lankan Government and CMPort. Commentators suggested this was an instance of China’s ‘debt-trap diplomacy’—that is, the practice of granting unsustainable loans to other countries with the objective of later seizing strategic assets when they cannot repay the debt. Such allegations became entangled in the geopolitical competition between China and the United States, as well as between China and India. Then US Vice-President Mike Pence, for example, accused China of using ‘debt diplomacy’ to expand its influence in a high-profile speech in 2018. There was also speculation that China’s intention was to turn the port into a military base, which both countries have repeatedly denied.
Closer examination of Sri Lanka’s debt burden, however, suggests that when the leasing of the port was being contemplated, debt servicing to China was relatively low compared with other financial obligations the country needed to meet. Based on statistics from the SLPA in 2015, there were five loans from China Eximbank, totalling 1.26 billion USD—70% of them preferential with a 2% interest rate. Calculated from statistics from the SLPA’s annual report for 2016 and the Central Bank of Sri Lanka’s annual report (2016), by the end of 2016, when the Sri Lankan Government was negotiating the lease with CMPort, the outstanding balance of the loans pertaining to Hambantota Port was 1.098 billion USD, or 4% of the Sri Lankan Government’s total external debt; the outstanding debt to the Chinese Government and China Eximbank was 9.2% of Sri Lanka’s total outstanding foreign debt. Debt-servicing costs for China Eximbank loans for Hambantota Port amounted to less than 5% of the country’s total foreign debt repayments, and the loans related to Phase II of the port were still in the grace period. In fact, the 15.3 billion USD of international sovereign bonds the country issued between 2007 and 2018, which came with higher interest rates and shorter maturity periods, were a greater financial burden for Sri Lanka than the Chinese loans. In 2019, debt-servicing costs for the sovereign bonds amounted to more than 40% of Sri Lanka’s total debt servicing. At the time the port lease was negotiated, China was not the country’s top creditor, and Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank.
Despite the energy successive Sri Lankan governments have put into moving the project forward, the high expectations of Hambantota acting as an engine for local economic development have so far not been realised. In 2016, the port had only 281 ship arrivals, compared with 4,405 for the Port of Colombo. The numbers did not improve in 2017 and 2018 (230 and 270, respectively). By the end of 2016, Hambantota Port had accumulated about 300 million USD of losses.
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