Despite Security Assurances, Chinese Consolidation of Sri Lankan Ports Remains a Worry for India


In terms of geo-political strategy, Sri Lanka’s economic dependency on China and the precedent it has set, Indian experts are apprehensive of the growing Sri Lanka-China relationship.

A group of Sri Lankan visitors at the new deep water shipping port watch Chinese dredging ships work in Hambantota, 240km (149 miles) southeast of Colombo, March 24, 2010. Credit: Reuters/Andrew Caballero-Reynolds/File Photo

A group of Sri Lankan visitors at the new deep water shipping port watch Chinese dredging ships work in Hambantota, 240km (149 miles) southeast of Colombo, March 24, 2010. Credit: Reuters/Andrew Caballero-Reynolds/File Photo

New Delhi: As Sri Lanka handed over majority stake in the Hambantota port to a Chinese firm for 99 years in a ‘debt-equity’ swap of $1.1 billion, India hopes that the security assurances inserted in the concession agreement holds fast in the future. However, apprehensions remain about the precedence set by this ‘distress sale’ for other Chinese projects in the neighbourhood.

On Saturday, the Sri Lankan government signed the amended concession agreement with the Hong Kong-based China Merchant Port Holdings Limited (CMP) in a 40-minute ceremony, which was the culmination of a year-long negotiation process, marked by controversy and opposition.

The construction of the hi-tech port was completed and operations began in 2010. It was part of a slew of mega infrastructure projects launched by then Sri Lankan president Mahinda Rajapaksa, whose family hailed from the coastal city of Hambantota. All of them were funded by Chinese loans, which stoked apprehension in New Delhi about the Rajapaksa government’s red carpet for Beijing.

The new coalition National Unity government came to power in 2015, with a campaign promise to review all Chinese projects in Sri Lanka. But the reality of the external debt situation meant that Colombo had to return to Beijing, which played hardball to get its stalled project restarted.

With Sri Lanka projected as an important component in China’s ‘Belt and Road Initiative’, the Chinese government patiently waited for Colombo to return to the fold – and it did.

The deal goes ahead

In January, the Sri Lankan government signed the framework agreement, but the condition of 80% share to the CMP for operating the port and the lease period of 99 years led to outrage, both inside and out of the government. The government announced that it will re-negotiate the terms.

As per the details of the new agreement made up of 121 pages, 67 clauses and 17 schedules, the deal will involve the creation of two new companies that will manage and operate the port  – Hambantota International Port Services (private) limited (HIPS) and Hambantota International Port Group (private) limited (HIPG).

According to a statement released by the government, HIPG will have a share split of 85:15 between China Merchant Port Holdings Limited and the Sri Lanka Ports Authority (SLPA). CMP will acquire an 85% share from the SLPA at a cost $973.6 million. The Chinese firm will also transfer another $146 million to a bank account which will have to be utilised for port activities within one year.

Further, according to the disclosure on the Hong Kong Exchange on July 25, the CMP will use a portion of the $973 million to acquire 58% of issued share capital of HIPS, which will be used to “develop, operate, maintain and manage the Common User Facilities”.

The Sri Lankan government, when it announced the details of the agreement on same day in a press conference in Colombo, stated that the SLPA “will hold a share of 50.7% and China Merchants Ports 49.3%”  The Sri Lankan government was specifically keen to highlight that HIPS would be in charge of the management of port services like security and navigational services.

Interestingly, the cabinet memorandum, seen by The Wire, claims that the SLPA will have 50.7% stake, but adds in parentheses that 42% will be direct stake, while another 8.7% will be held “indirectly through HIPG”.

The final agreement signed on Saturday said that HIPS’s initial equity share capital is to be comprised of “forty two percent (42%) to be held by the port authority, and 58% of equity share capital to be held by HIPG operator (ie CUF operator)”.

The language in the concession agreement – also seen by The Wire – seems to be more in line with the China Merchant Port’s disclosure rather than the Sri Lankan government’s indication that the SLPA (directly and indirectly) had a majority stake in HIPS.

It is unclear at this point how the SLPA has an indirect stake of 8.7% in HIPS through HIPG, when China Merchant Port will acquire an 85% stake in HIPG.

Further, HIPG – with China merchant’s 85% stake and a capitalisation of $794 million – will have the authority to “lease, finance, construct, develop, operate, maintain, manage the port property excluding the common user facilities”.

After 70 years, the SLPA will have the right to purchase the entire shareholding of HIPG at a “fair value”. If not, after 80 years, so in 2097, the SLPA will have the right to increase its shareholding to 60% by buying shares at price of $1.

Giving reasons for entering into the agreement, the Chinese firm, which is partially state-owned, said that Hambantota occupied a “prime location within 10 nautical miles to the main shipping route from Asia to Europe” and is also in a strategic position along the “Silk Road Economic Belt and the 21st Century Maritime Silk Road”. Sri Lankan Prime Minister Ranil Wickremesinghe participated in Beijing’s Belt and Road Initiative’summit in May, which had been boycotted by India.

Highlighting Chinese dominance in the port sector of Sri Lanka, the CMP noted that it had already developed the Colombo International Container Terminal, the contract for which had been signed in 2011. Therefore, it noted in its disclosure to Hong Kong exchange, the new agreement would provide a “platform to materialise synergies between the two major ports in Sri Lanka, unlocking the county’s potential to be a global maritime center”.

India apprehensive

In New Delhi, the signing of the concession agreement is not a welcome development. But with Colombo having no good options other than approaching the Chinese to escape its debt burden, India has no choice but to accept that Hambantota will be operated by Chinese firms.

There were also some questions about the hurry shown by the Sri Lankan government to sign the deal without the agreement being debated in parliament.

Sources confirmed that India had definitely been in the loop during the negotiations for the agreement and had insisted – along with the US – on the inclusion of specific clauses on security.

An Indian Navy helicopter takes part in a joint Indo-Lanka naval exercise at Trincomalee navy base, about 275km east of Colombo. Credit: Reuters

An Indian Navy helicopter takes part in a joint Indo-Lanka naval exercise at Trincomalee navy base, about 275km east of Colombo. Credit: Reuters

As per the July 25 cabinet note, the concession agreement has “strict prohibitions” to prevent “any form of military related activities” by the two companies. It stressed that the “sole responsibility and authority for such activity and for National Security of the port of Hambantota with the Government of Sri Lanka”.

“GOSL will have the right and authority to grant permission, clearance and approval to berth naval vessels in the port, on mutual agreed payment terms,” said the cabinet note.

Further, the SLPA will convene an oversight committee to manage security within and outside the port, with officials from the Sri Lanka navy, the Sri Lanka police and a representative of the secretary to the Ministry of Defence.

“All personnel involved in security services and related matters by the two companies shall be Sri Lankan nationals,” it said.

Sri Lanka in a fix

The Sri Lankan government has admitted that the country is trapped in a “gigantic debt trap” mainly due to loans taken by the Rajapaksa government. Sri Lanka has entered a into three-year IMF loan programme for $1.5 billion, but that may not be enough to achieve the vision of a debt-free nation by 2020.

The total outstanding external debt was $25.61 billion in April 2017. So far, Sri Lanka has disbursed around $713.4 million to service its foreign debt. This year, Sri Lanka will have to pay back around $2.42 billion, which will increase to $2.56 billion in 2018.

Chinese loans account for over $8 billion of this amount, which have not really yielded results. As per the shipping minister, the Hambantota port has progressively handled less ships every year – from 19 ships in 2015 to 14 in 2016. In the first six months of 2017, ten ships have come to the ports. These numbers exclude car carriers which have been forcibly diverted from Colombo port since 2012.

With the debt-equity swap, the $973 million to be transferred from the CMP to the SLPA is likely to go into debt servicing. The SLPA had taken a loan of $1.3 billion for construction of the Hambantota port, with the annual loan repayment commitment by the port authority being around $59.2 million.

Since the start of commercial operations in 2011, SLPA’s total loss has been $304 million, according to the figures released by the Sri Lankan government.

A bad precedent

“Chinese financed-projects in Sri Lanka are a cautionary tale for all developing countries who wish to access Chinese funding under OBOR,” said Ashok Kantha, who was Indian high commissioner to Sri Lanka from 2009 to 2013.

He asserted that the “common feature” of China-funded projects in Sri Lanka, like Hambantota port and airport, and Norochcholai coal power plant is that “all of them were done without any economic due diligence”.

From India’s perspective, Chinese funding of the project is purely for strategic reasons. “If you are getting just 14 ships a year, it is not viable commercially. Chinese investments are for reasons other than commercial considerations,” he added.

He felt that Hambantota has implications as a “bad precedent” for other similar projects which have availed Chinese loans.

Kantha suggested that there should more “public domain assurances” from Sri Lanka that Indian concerns “will be taken on board”.

The former diplomat, who retired as Indian ambassador to China last year, pointed out that given the location of Sri Lanka, India’s security was “inter-linked” with its southern ocean. “We have that kind of relationship that we are mindful of each other’s sensitivities,” said Kantha.

He hoped that India had got some “clarity” on the security assurances, but Kantha was sceptical about their sustainability and believed that India should remain “watchful”. “Even with assurances, usage can change over a period of time. If you look at Gwadar, it was meant to be a commercial port to be run by Singapore PSA. Then PSA was pushed out and Chinese moved in. Now talk is there of it being put in use as a naval facility for China,” he said.

According to P. Sahadevan, a professor of south asian studies at Jawaharlal Nehru University, the presence of security clauses in the agreement was not the main worry. Sahadevan was troubled by the “economic dependency” that China has fostered in smaller countries through big projects funded with Chinese loans.

“The Chinese are not going to engage in military diplomacy. You don’t have to send nuclear submarines to demonstrate that they have influence,” he said.

Incidentally, Sri Lanka had refused permission to China to dock a submarine at Colombo port in May.

Observer Research Foundation’s N. Sathiyamoorthy felt that the removal of Arjuna Ranatunga as ports minister during the cabinet reshuffle earlier this year raised eyebrows, as he had been a strong votary of Sri Lanka’s security concerns. He had been rather vocal in saying that the SLPA should run the port and had strongly lobbied for the reduction of the stake of the Chinese firm to below 80%.

“If the present government leadership is straight and sincere, they could have gone ahead with the negotiations with Ranatunga as ports minister,” he said.

The veteran Sri Lanka watcher added that Indian concerns had been addressed by Colombo “to an extent”.

“If China’s real intentions on the Hambantota stakes deal was geo-strategic and the encirclement of India, there would be safety valves provided in the agreement itself,” he  said.

He pointed out that the issue of Chinese ships at Sri Lankan ports was another matter, noting that the Chinese submarines visited the Colombo port in 2014, despite the Hambantota port being ready.

“The present government having renewed Rajapaksa’s ten-year ACSA pact with the US, there may be real issues if China were to seek such facilities, with or without long-term agreements of the kind,” he said. Sathiyamoorthy was referring to the fact that not just India, the US is also not too keen to see Chinese vessels in the strategic waters of the Indian ocean.

India's external affairs minister Sushma Swaraj (L) talks to with Sri Lanka's Prime Minister Ranil Wickremesinghe during their meeting in Colombo, Sri Lanka February 5, 2016. Credit: Reuters/Dinuka Liyanawatte

India’s external affairs minister Sushma Swaraj (L) talks to with Sri Lanka’s Prime Minister Ranil Wickremesinghe during their meeting in Colombo, Sri Lanka February 5, 2016. Credit: Reuters/Dinuka Liyanawatte

China’s point of view

But China also has value for Colombo beyond the economic aspect.

“As long as the US-led West does not take a clear-cut, pro-government, pro-Sri Lankan armed forces position on war crimes and the like, and putting a permanent end to the human right hassles at Geneva, now or later, in the present form or otherwise, no government in Colombo would want to antagonise China with its UNSC veto vote so very completely,” he said.

This perception was apparently boosted by India’s vote in favour of the US-sponsored resolution against Sri Lanka in the UN human rights council in 2012. It was the first time that India had voted in favour of a country-specific resolution in a multilateral platform, after pressure from then UPA coalition partner, DMK.

“After the 2012 UNHRC resolution, on which India voted with the US and the rest of the West, even strong supporters of India in Sri Lanka otherwise feel that they cannot risk putting off China, now or possibly ever. Their reading then and now is that despite not being a veto power in the UNSC, India (alone) had the power to stall theUNHRC resolution or help defeat the same – but did not,” asserted Sathiyamoorthy.

India’s role in Sri Lanka

Even as Chinese projects were getting back on track, Wickremesinghe had pushed for India to take charge of the development of the northern port of Trincomalee. An umbrella MoU signed during his visit to India earlier in April listed over ten major projects, which included the development of an oil tank farm at Trincomalee.

“What Ranil Wickremsinghe is trying to do is to show that he is following an equidistant relationship. But considering that the neighbourhood was largely India’s sphere of dominance, the presence of China in a core sector of the Lankan economy will have certain worries,” said Sahadevan.

For now, India remains the biggest trading partner for Sri Lanka, with bilateral trade in 2016 amounting to $4.38 billion. In development assistance, India has committed over $2.6 billion in loans and grants.

Sahadevan is unconvinced that that the Trincomalee port proposals will come to fruition, as there is a rising resentment against foreign ‘acquisition’ in national ‘assets’ of Sri Lanka. “India is historically seen as a country that Lanka needs to be worried to be about… Resistance is going to be high,” he asserted.

The ‘joint opposition’, largely made up of Rajapaksa loyalists and Left parties, had protested the plans to “give” the Trincomalee port to India, but they have already gone on the streets against the opening of a special economic zone attached to the Hambantota port. In January, there were clashes as residents fought with the police against the acquisition of 15,000 acres of land for the industrial zone.

The main operator of Hambantota port has already entered into a cooperation framework agreement with the China harbour for joint development and operation of the industrial park. It could involve both companies buying shares in each other’s subsidiaries.

However, China Merchant Port Holdings disclosed to Hong Kong exchange that “detailed terms and conditions for such cooperation have not been agreed and no definitive documentation have been entered into” till last week.

At the same time, the Chinese firm asserted that “if such cooperation materialised, it will generate further synergies and growth for the Hambantota Port”.

There is consensus that the government will not find the implementation of the various projects “smooth sailing”, with the opposition clearly sharpening their knives in anticipation.

“Despite ideological proximity with China, and also the large-scale Chinese investments in Sri Lanka when Rajapaksa was in power, accompanied by political equations and relations, the Rajapaksa camp can be expected to make political capital of the Hambantota stakes transfer as being anti-national, a ‘sell-out’ of national interests, security and sovereignty,” said Sathiyamoorthy.

Incidentally, Modi met with Rajapaksa in May at the Indian high commissioner’s residence in Colombo, despite the joint opposition earlier threatening to show black flags during the Indian prime minister’s visit.

The former president had publicly blamed India for his defeat in the 2015 presidential elections, claiming that New Delhi had been swayed by his implied preference for China. He had even suggested that he had first offered the Hambantota port to India, but had gone to China after getting no response.

Refuting this claim, Kantha, who had been ambassador during Rajapaksa’s presidency, said no such offer had ever been made to India. “There is nothing on record to indicate that it was offered to us and we turned it down. That’s a red herring which has been planted in the public domain,” he told The Wire.

While politics plays out in Sri Lanka, China continues to remain its main development assistance partner and lender.

The Sri Lankan finance ministry’s mid-year fiscal position report show China accounts for 40% (or $170 million) of foreign disbursements in the first six months of 2017. India had released $10.5 million in the same period.

This scenario will not change drastically over the next few years. Over the next five years, the total undisbursed balance of foreign funds already committed as loans are over $8 billion. China has the biggest share at 28%, but the Asian Development Bank and Japan have also made substantial offers at 24% and 18% respectively. India’s share, as per the figures on April 30, is 3%.