YAHAPALANA AND HAMBANTOTA Part 2
Posted on March 4th, 2017
Yahapalana government had its own idiosyncratic approach to Hambantota. Instead of continuing with the project, as it should have done, since Phase 3 was in place, Yahapalana suspended the Hambantota project in January 2015. Yahapalana announced that the performance of Hambantota port had not been satisfactory. Port operations started in November 2010 and after six years, in 2016, an operating profit of US$1.81 million is reported which is far too short to proceed with loan repayment, it said. Hambantota port incurred losses of 1917 million in 2014 and 2015. Eran Wickramaratne said Hambantota was a white elephant making huge losses. Others said that the Chinese loans were a sunk cost. Nobody will want to invest in Hambantota.
Engineers Association, Sri Lanka Ports Authority (EASLPA) disagreed. It accused the government of attempting to hide the true financial potential of the port and the proposed industrial zone in Hambantota. According to them, the port has earned revenue of Rs.1.2 billion in 2014 which had gone up to Rs.2.0 billion in 2015 through just two berths. Therefore, the port could earn over Rs.11 billion in annual revenue if the second stage of the port development continued as planned with 11 berths to be built. Out of this, SLPA receives 60 percent as net profits while the balance 40 percent goes to Magampura Management Company (MPMC) as operational overheads. The engineers also stated that Hambantota port loan was to be serviced through part of the rent income by re-leasing 120 hectares of SLPA owned land of the proposed Port City project as Port City management was at that time under the SLPA (Daily Mirror 13.2.17 Business supplement p 1).
Samantha Kumarasinghe, Chairman, Multichemi Group of Companies and head of Nature’s Secrets said on television (Ada Derana 23.3.17) that it is possible to pay the annual debt on Hambantota from Colombo port earnings. There is a surplus of around USD 400 million from vehicle imports alone. It is not necessary to lease Hambantota port to China.
Yahapalana government’s financial calculations differed from those of Rajapakse. Yahapalana said the country was greatly indebted due to the Hambantota seaport construction and other similar haphazard projects carried out by the previous regime. Millions were spent on blasting rock. There were also other preliminary costs such as land acquisition and Kataragama main road diversion. The total cost is over USD 800 million or more.
Yahapalana said Rajapakse had borrowed USD 1.3 billion to do Hambantota with no revenue plans. He had borrowed USD 600 million for 13 years, USD 147 million for 12 years and USD 157 million for 12 years from Exim bank. Interest was 2% to 7.5 % with operation loss at staggering Rs 9 billion per year since 2014. Sri Lanka has to repay China around 8 billion in loans that the Rajapakse government had taken. Since there was no income, Sri Lanka Ports Authority had to pay up on the loan and this amounted to about US$ 73 million (Rs. 10.6 billion) in 2016. This was affecting the whole economy of Sri Lanka. The country had no funds to pay. The government may have to make a distress sale out of Hambantota.
The Engineers Association disagreed. The total loans obtained to develop the port was US $ 1.2 billion, out of which, US $ 840 million was taken at a rate of 2.0 percent while the balance US $ 360 million was at a rate of between 6 -7 percent per annum, they said. The earlier plan was to service the Hambantota port loan through part of the rent income by re-leasing 120 hectares of SLPA owned land of the proposed Port City project as Port City management was under the SLPA earlier. However, since the SLPA has now been relieved of Port City administration, the authority does not receive this income or the additional income from the second stage of the Hambantota port, as the operation of the terminals have not yet commenced.
Yahapalana admitted that without a doubt, Hambantota port can generate multiple benefits to the country, if managed effectively. FTZs are ideally located near a sea port or an airport and Hambantota is a perfect location. Government should pursue this, advisors had told Yahapalana. But to become financially viable, and be ‘properly established as an industrial port,’ Hambantota needed a financial and business plan. This could only be done by a company, (presumably foreign) which had vast experience in maritime operations and strong links with international maritime operators, replied Yahapalana. In addition, foreign industrialists must be invited to set up their factories in Hambantota port, to make it ‘a world class industrial port in the future.’
Foreign direct investment (FDI) was urgently needed to keep Hambantota afloat. External funds were needed to complete the project as well since the government did not have the money. The government therefore has no option other than handing Hambantota over to a reputed port operator to ensure income to the Government to at least meet the loan component.
Engineers Association challenged this. The original plan was to establish the country’s largest industrial zone inside the port premises with an extent of 7 square kilometers, through which the government had planned to earn income from multiple sources. It was planned to lease one hectare of land at the rate of Rs.7.5 million subject to 3.0 percent annual increase. Therefore, a lease of a minimum of 600 hectares must earn more than Rs.4.5 billion per annum, they said. An artificial island which was built using the excavated earth during the second stage of development of the port could have also been leased out on a long term lease to settle a large portion of the debt of the project but this too has still not been explored.
The government did not call for worldwide tenders as expected. They would have got a better deal if they went for international bids, said critics. DP World Dubai would have been an ideal partner. The government ignored local investors as well. Obeysekera says at least three local companies – John Keells Holdings, Aitken Spence and Hayleys had earlier applied to operate the bunker and vehicle terminals at Hambantota Port after proposals were called by the Government. But all these have been given to the Chinese without even an explanation to these parties.
Yahapalana government decided to stick firmly to China. Since debt/equity swaps are not possible in China the government engaged in direct negotiations with two Chinese companies, nominated by the Government of China. The two companies, China Harbour Engineering Co. (CHEC) and China Merchants Ports Holding Co. (CMPCH) put in rival bids to take over the whole harbor. CMPCH won the tender, offering 80-20% though CHEC had made the better offer of 35%-65%. CMPCH refused to alter their offer, saying Sri Lanka‘s Cabinet Committee on Economic Management (CCEM) and Sri Lanka Cabinet had already approved it.
Accordingly, a Framework Agreement has been signed between SLPA and China Merchants Ports Holding Company. This provided for the setting up of a Joint venture (JV) company between CMPCH and the Sri Lanka Ports Authority in which the Chinese company will hold 80% of shares and SLPA 20%. This will entitle the SLPA to a single seat on its board. The lease would be for 99 years, extendable for another 99 years. China insisted that no other port facility be developed within 200 kilometers from the perimeter of the Hambantota Port. Once signed, the agreement would become a binding contract between the SLPA and CHMPC which cannot be amended unless both parties approve the changes. The government announced that the port would be strictly for commercial operations, there will be no military presence except that of the Sri Lanka Navy.
Under the agreement, all debts, loans, claims and liabilities in relation to the Hambantota port, including any accumulated debts in relation to design, development and construction of the Hambantota Port, existing prior to or relating to the period prior to the transfer of assets of the project to the JV, would be the responsibility of the Government of Sri Lanka. JVC will acquire or lease all operational assets and common user facilities, including container terminals, multi-purpose terminals and oil terminals with fuel storage and supply facilities, the manmade island, sea channel, breakwater, access road, turning basin, navigation, cofferdam and common user terminals. . JV would collect all the revenue from services. But CHMPC had said that it would pay royalty on a revenue sharing basis only once the port reached a certain level of performance, not before.
JV will have comprehensive control of Hambantota port, including its internal security. The SLPA had wanted the security of the port to be handled by the SLPA, but the Chinese had insisted on the JV doing this. Accordingly, the framework agreement states that all internal security within the Hambantota Port premises, the safety of the cargo, vessels, and the personnel, including but not limited to manning of the entry/exit gates shall be the responsibility of the JV while the national security of Hambantota port shall be controlled by an oversight Committee consisting of representatives of the Sri Lanka Navy, Sri Lanka Police and SLPA. . Exactly who owns and manages the harbor is unclear, say critics. “While ports are managed by private parties, harbors are generally under the control of a state as it involves national security.”
The main functions of a port are usually carried out by the port’s owner, its operator, regulator and navigator. But these functions as well as other services like berthing, tugging, loading, unloading and transporting ships, presently handled by the SLPA, were to be handed over to the CHMPC under the agreement. CHMPC also get control of pilotage (directing ship movement) service, navigation service, tug service, berthing service, port security service, lighterage (use of lighters in loading, unloading and transporting ships) service, shipping and transshipping, warehousing, mooring service, wharfage, supply of water, fuel and electricity, bunkering and inner anchorage service. The Chinese company also gained control of diving and ship repair including underwater ship repair service, handling petroleum, petroleum products and lubricating oils to and from vessels and between bunkers and depots, and any other service incidental to all services stated above. It is not clear if the oil tank facility is also included, say critics.
Ministry officials see some of these functions as “sticky issues” which are also critical. The Ministry feels that functions of Harbour Master and Pilot, who are responsible for piloting a vessel into the harbor, should come under SLPA. Harbour Tonnage (a fee levied by a Port based on the size/capacity of the vessel, when she enters a Port) should be collected by the SLPA, being the owners of the port. SLPA should also be responsible for maintenance of the breakwater, turning bay, entrance channel and associated facilities.
The Yahapalana handling of the Hambantota port has led to much criticism. It is openly agreed that Hambantota port had the potential to become a very successful long term investment. Hambantota port can be turned around, critics said. Hambantota should be utilized for Sri Lanka’s benefit. The Sri Lankan government should have initiated a strategy with the private sector in developing the port and an industrial zone.
Yahapalana has no strategic marketing and a development plan to make the port and the airport a profitable venture, critics charged. Instead of wasting two years criticizing the previous regime, the current administration should have got into business with a proper strategy in marketing and developing the port with the private sector. The strategic location itself has been undervalued, they charged. Hambantota is a very valuable, highly important national asset. It needed a thorough professional analysis before selling or leasing. Government should have obtained such reports. Did they do so?
Critics ask why Sri Lanka couldn’t hold on to 55 percent of equity, instead of keeping only 20 percent. They suggest that SLPA should use its 20% equity to induce some local companies to invest in various ventures and show a Sri Lanka presence to the Chinese rather than just holding one seat in the Board of Directors. But why didn’t Sri Lanka go for a 33-year lease or 50 years?
How will a Hong Kong style 99 year lease benefit Sri Lanka? The purpose of building the Hambantota harbor was to make it a profit making enterprise for the country. There is no point in taking loans for a venture if it is to be given back to the lender for 99 years. A 99 year lease with a Chinese company with the private party owning 80% of the lease means a virtual sale. Under these agreements, lessees are stronger than the owners. There is no point in saying the ownership is with the government.
Critics also said that the upfront payment of US$ 11.3 million per year for 99 years on a current value basis is quite inadequate for such a massive port asset. A 110 hectare islet has been tossed into the deal and will also be leased out to China. During the Rajapakse regime a Malaysian company had offered 500 million USD for a 99 year lease on this islet alone. At this point the government announced that there will be a buy back clause in the agreement.
Does the government have a mandate to sell strategic resources of the country with associated adverse impact on human lives, environment and above all its sovereignty asked the intelligentsia. In January 2017, some of them were planning seek the advice of the Attorney general on whether the Sri Lanka Ports Authority can hand over an entire port to a foreign company. They observed that the final agreement has still not been signed.
Rajapakse issued an official statement, saying his government had set up a joint venture between China Harbour Co and China Merchant Co to operate the Hambantota container terminal for 40 years, with 65% for the company and 35% for the government while a royalty of 2.50 USD per container (which would increase by 1% per year) would be paid to the Ports Authority as well as a rental per hectare. Other than the container terminal, all other terminals in the harbor and the 2,000 hectare industrial zone were to be controlled by the Ports Authority. The Authority would also have derived income from the cargo passing through the terminals.
Rajapakse said the new government has made some unwise decisions. Firstly, they disregarded the management contract for the Hambantota container terminal entered into by my government with China Harbour Co and China Merchant Co. Secondly, the Ports Authority had developed the Colombo East container terminal and upon its completion by 2016, this terminal would have produced a revenue of more than 100 million USD a year which the Ports Authority had earmarked to pay off the Hambantota loan until the latter generated sufficient income. The Yahapalana government halted the Colombo East terminal development. Thirdly, by the end of 2014, my government had signed agreements with several foreign and local companies to lease out about 80 hectares in the Hambantota port industrial zone at the minimum rate of 50,000 USD per year per hectare with minimum guaranteed volumes of cargo and minimum guaranteed royalties. All those agreements were disregarded by the new government.
Continuing, Rajapakse observed that Yahapalana government said the Hambantota port was a white elephant and that it had to be privatized to raise the money to pay off the loans taken to build it. They called for bids, not just for harbour operations but for the rights of the landlord over the entire 2,000 hectare free port so that whoever takes the long lease will operate the entire harbour and have complete control over the industrial zone as well. The two companies China Harbour Co and China Merchant Co which made a joint proposal to lease out the Hambantota container terminal for 40 years during my government are the same companies that have made rival bids to lease the entire free port under the present government.
This bid has been accepted in a situation where the other company China Harbour Co. had (according to information available to us) put in a much more favourable bid to lease the free port on a 65-35 equity sharing basis for 50 years with an upfront payment of 750 million USD plus the payment of all the charges they had earlier agreed to with regard to the container terminal management contract. The government has chosen the least favourable bid despite (according to information available to us) the Ports Authority having recommended the other bidder. Details of how the two proposals were evaluated have not been disclosed. Rajapakse said that the bid rejected by the government was more favourable to Sri Lanka than the one that has been accepted. It would have given an upfront payment of 750 million USD or Rs. 112 Billion.
Rajapakse went on to say, a framework agreement has been signed by the govt. with China Merchant Co to lease out the entire free port for 99 years for a payment of 1.08 billion USD on a 80%-20% equity sharing basis. No other income will accrue to the Ports Authority for 15 years, after which they will receive dividends for their 20% stake only if dividends are declared. The lease will be extendable for another 99 years and a 44 hectare artificial island outside the port has been included in the deal. There is provision for the construction of another 20+ berths and the rights over these too have been given to the lessee. The amount of the lease seems to have been based only on the construction cost of the port without an accredited international valuation reflecting the strategic location value of the port, the value of the 99 year period, its 2,000 hectare land, the oil tank farm and the value of its present commercial operations.
Rajapakse continued, a 99 year lease impinges on Sri Lanka’s sovereign rights because a foreign company will enjoy the rights of the landlord over the 2,000 hectare free port while operating the entire harbour as well. This is not an issue with China or with foreign investors. It is about getting the best deal for Sri Lanka. The agreement that my government negotiated with both China Harbour Co and China Merchant Co to manage the Hambantota container terminal for 40 years is the best deal yet. The bid made by China Harbour Co for a 50 year lease is obviously more favourable than the bid made by the other company.
As a matter of principle, I am against the leasing of the entire harbour for 99 years and giving the rights of the landlord over the industrial zone to a foreign private company. The industrial zone and the harbour should be controlled by the Ports Authority while harbour operations may be given on management contracts to the private sector. For example, the Colombo port is run by the Ports Authority and two private operators. The Ports Authority has full control over the Colombo harbour as well as equity in the two privately run terminals. I believe this should be the approach to the Hambantota port as well.
Rajapakse continued, apart from the entire Hambantota free port, the government has decided to lease a further 15,000 acres outside the free port to a foreign company for 99 years. In a situation where even the 2,000 hectares within the free port have not been utilized yet, on what grounds can we justify the leasing of another 15,000 acres to a foreign company? The total land area of all the Board of Investment economic zones in the country at present put together do not amount to 2,000 hectares.
Rajapakse concluded, a 15,000 acre zone in Hambantota will be disproportionate to our country’s economy. Furthermore, the disruption caused to the people of the area will be immense if 15,000 acres of land were to be acquired for this purpose. The government should fill the free port with investments first before opening more zones. Furthermore the government should have supervision over the kind of factories that will be opened in these industrial zones, the fuel they use and the waste they produce. My government agreed only to the use of LNG gas, even though some potential investors wanted to use coal.
Lastly, the question of paying back the China loan. The government will receive around US$ 1.1 billion in 2017 from the Hambantota deal. However, it transpires that this money will not go towards paying the loan, as announced earlier. It will be put into the Consolidated Fund and spent as the government wishes. It will help improve the country’s Balance of Payments said Yahapalana soothingly to its angry voters.