Was cash strapped Sri Lanka duped by China in Hambantota Port?

The Hambantota Port is located in southern Sri Lanka close to the east-west sea route. Its construction began in 2008 which was funded through Chinese loans of about US$ 1.3 billion.

The construction was carried out by a joint venture of China Harbor Engineering Company (CHEC) and the Sino Hydro Corporation.

Phase I of the project was completed in 2010 and the port commenced commercial operations in November 2011. Phase II of the project began in 2012 and was completed in 2015. The total expenditure on building the port and equipping it was about US$ 1.5 billion.

By 2016, the Hambantota Port under the ownership of Sri Lanka Ports Authority (SLPA) had incurred losses of about SLR 46.7 billion. Meanwhile, Sri Lanka had to repay nearly US$ 1.7 billion to China as principal and interest for the loan it had taken to build this Port (till about 2036). The debt repayment for this loan at that time was close to about US$ 100 million annually.

By this time, it was also clear that this expensive project was not commercially viable as had been shown in initial feasibility studies till a ‘suitable’ study found this to be commercially ‘feasible’.

Using this pretext of recurring losses, an elaborate scheme was designed to enable China to secure ownership of this port for 99 years in the garb of an investment into a Public Private Partnership to manage and operate the Port.

In December 2016, the Sri Lankan government announced that ongoing losses made it necessary to restructure the port in collaboration with China Merchants Port Holdings Company (CMPort) to make it commercially viable.

A number of documents were concluded between the Sri Lankan government and CMPort between 2016 and 2017. As a result of these documents and a Concession Agreement signed in July 2017, two newly created entities called the Hambantota International Port Group (HIPG) and Hambantota International Port Services Co. Ltd (HIPS) took control of the Hambantota Port and its operation and management for a period of 99 years.

CMPort agreed to ‘invest’ US$ 1.12 billion for the acquisition of 85% stake in HIPG and a 52% stake in HIPS. The remaining stakes in HIPG and HIPS were given to SLPA. Thus, the overall percentage of shares held in the Hambantota Port by CMPort is about 70%. HIPG would develop and manage the port along with adjoining land, while HIPS would operate the Port services.

Interestingly, there was no change in Sri Lanka’s debt obligations for this project following the acquisition of stakes by Chinese entities in the Hambantota Port. Payments for these stakes were sent to the Treasury which possibly used it for other purposes perhaps.

Therefore, Sri Lanka continues to repay the debt despite restructuring the Port itself and handing it over to China. When taking over the Port, both HIPG and HIPS did not inherit any liability in this respect and GoSL continued to be liable for the debt existing prior to the transfer.

This was reconfirmed during a recent hearing (22 June 2022) under the aegis Committee on Public Enterprises (COPE) of the Parliament of Sri Lanka where it was revealed that the loans taken for the construction of the Hambantota Port had not been repaid with the ‘investment’ by the Chinese company in 2017. Therefore, Sri Lanka continues to bear the debt for the failed port despite restructuring it and handing it over to a Chinese entity for 99 years.

It was further revealed that these liabilities have not been correctly reflected in either SLPA or Government accounts. Chairman of the COPE recommended that necessary steps be taken to include the loan liabilities in a suitable manner in the publications/reports within a month.

The Hambantota Port also enjoys an exclusivity period which says that there shall not be any port/terminal development directly in competition with the Port within 100 km from the Port (with some exemptions).

Despite having a number of berths for various purposes with different depths and being operational for about a decade, the Port witnesses visits by only about 400 vessels annually. In comparison, the Port of Colombo handles about 4,000 vessels annually.

While the Port’s website claims various kinds of capacities in terms of bulk cargo, container movement and Ro-Ro, the actual ability to handle such volumes is doubtful as the supporting infrastructure and equipment such as suitable cranes for such volumes are not visible.

According to informed sources, major shipping lines are not keen on Hambantota Port yet for movement of containerized cargo. Therefore, containers are not handled in any significant way at Hambantota Port currently.

The current focus at the Hambantota Port at the moment is trans-shipment of vehicles (Ro-Ro) which according to shipping experts is not a very profitable operation. The other area is bulk cargo such as cement clinkers, bunkering fuel and LPG for some units located nearby.

The ongoing economic challenges have further affected the Port’s throughput. Work related to port development has also been reportedly halted currently due to the ongoing fuel/forex crisis.

Some limited bunkering operations are carried out at the Port. The Port has entered into a strategic partnership with Sinopec for bunkering which provides fuel to local bunker operators in Sri Lanka who then sell it to visiting ships. It is learnt that local bunkering operators prefer to buy oil from Singapore as it is cheaper compared to HIPG/Sinopec’s bunker fuel.

Given the constraints in expansion in areas such as container cargo, Ro-Ro, and bunkering, there have been efforts to speed up the development of an industrial zone adjoining the Port as an effort to make the Port attractive or feasible. Several MoUs and agreements have been signed mostly with Chinese or local entities for tyre manufacture, vehicle assembly, appliances, cement, cargo storage etc. Work on some units has commenced while others remain suspended.

It appears that Hambantota was initially a part of a string of strategic locations that China wanted to develop without any consideration for feasibility. The money spent on the Hambantota Port is in no way commensurate with the massive investment/loan that has gone into the project.

The scheduled expansion of capacity at the Colombo port with the addition of two deep draught terminals will further reduce processing times, bring down costs and make the Colombo Port even more attractive. Further, the Colombo Port is already a very well-developed trans-shipment hub and located only about 200 kilometres away from Hambantota. Therefore, it is extremely unlikely that another Port would be able to flourish as a major container trans-shipment hub in such close proximity.

Separately, it is becoming evident that the actual volume of Chinese debt may be well above the current publicly available figure of US$ 3.3 billion which is about 10% of the Government’s debt. Certain experts estimate that this may be beyond US$ 6 billion or almost 20% of Sri Lanka’s external debt with lending rates that are higher than most concessional financing.

It is understood that the current official figures only account for project loans to the government and have not included Chinese loans to Sri Lankan state-owned enterprises and loans of other types.

China has also taken a tough approach on debt restructuring where it would need to agree with other creditors to help Sri Lanka achieve consensus with all its creditors. China has been reluctant to commit to debt restructuring and has offered to refinance its debt through another loan. It has also not permitted Sri Lanka to use a currency swap of 10 billion yuan executed last year by imposing tough conditions.

After Sri Lanka decided to approach the IMF, there were some initial statements from China which hinted that going to the IMF may impact Sri Lanka’s debt restructuring discussions with China. This indicates that China may continue to create challenges for Sri Lanka in its engagement with the IMF as well as during debt restructuring.