YAHAPALANA AND THE REPUBLIC OF CHINA Part 11
Posted on May 1st, 2017

KAMALIKA PIERIS

According to initial plans, drawn up during the Rajapakse regime, the Hambantota Port, when completed, would have consisted of four terminals and 12 berths. This new Port was meant to be a “free port” covering an area of 2,000 hectares where goods could be manufactured and shipped, as well as trans-shipped, with minimum delays. The first phase of the project became operational in 2011, The investment in the construction of the Port up to 2014 was approximately USD 450 million for the first phase, USD 70 million for the bunkering facility, and USD 802 million for the second phase, totaling USD 1,322 million. This cost was financed as loans from China.

Rajapaksa government also entered in to a Supply Operate and Transfer (SOT) management contract for 40 years with a joint venture between China Harbour Company and China Merchant Company to supply equipment such as cranes, and to operate the Hambantota Container Terminal. In return, the Hambantota Port was to receive a lease rental of USD 35,000 per hectare per year for the 56 hectares in the Container Terminal (a total of approximately USD 2 million per year), a royalty of USD 2.50 on every container loaded or unloaded, a wharf rate of USD 30 per container for cargo brought into Sri Lanka, as well as other usual harbour charges.

All terminals in the Port and the 2,000 hectare industrial zone, other than the Container Terminal, were to be controlled by the Ports Authority, and the Authority would have derived substantial income from the cargo passing through their numerous terminals, as well as enjoyed the capital growth derived by the project over the years.

Until the Port started to show profits, the Rajapakse government planned to utilize the revenues of approximately USD 100 million generated from the Colombo East Terminal to pay the loan and interest payments. The Port would break even within 10 years. However, Hambantota Port started making profits early. There was an operating profit of about Rs. 900 million in 2014, and Rs 1,200 million in 2015.  The trans-shipment of vehicles began in 2012, with 70% of the vehicles that were discharged in Hambantota being trans-shipped to other destinations. By 2014, 335 vessels called at the Hambantota Port, with 295 docking in 2015.

G.L.Peiris observed that if the deal had been done the way Rajapakse had intended, Hambantota would have been a sustainable entity. The Rajapakse agreement was only to lease a terminal of the port, not the whole port. By 2020, Hambantota port would have been a viable concern, investors were required to bring in $1.1billion and they had to pay a minimum of $50000 for lease/rent per hectare.  There was certainly no agreement to hand over 15000 hectares to a Chinese company either. That was not even thought of.

Unfortunately however, as soon as the new government took office, it made some reckless decisions, observed Nivard Cabraal. First, the government unilaterally abrogated the management contract for the Hambantota container terminal that was entered into with China Harbour Company and China Merchant Company. Second, the government halted the development of the Colombo East Terminal, which, had it been proceeded with, would have generated revenues of more than USD 100 million a year from 2016 onwards. Third, the agreements that the Rajapaksa government had signed by the end of 2014 with several foreign and local companies to lease out about 80 hectares in the industrial zone at a minimum rate of USD 50,000 per year per hectare, were abrogated by the new government. This affected revenue and placed the entire project at grave risk.

Yahapalana government thereafter announced that the Hambantota Port was a “white elephant” which cannot generate revenue, and said that the Hambantota Port had to be “privatized” in order to raise the money to pay the loans that were taken to build it. A Framework Agreement was signed with it after a protracted process. The clauses in the agreement had been changed four times.  A Concession Agreement is now awaited

Yahapalana wanted to sign an agreement with China to sell 80 percent of Hambantota port to China through a joint venture, for 99 years, while the balance 20 percent will be held by the Sri Lankan Government. There would be an option for China to sell back 20 percent of the port to Sri Lanka in 10 years. After the lapse of five months, 20 percent of China’s share will be available in the share market, said Yahapalana soothingly. Within five months, we can reduce 80 percent stake of the China Merchant Company to 60 percent. We can up our stake upto 40 percent. It is not known what price Sri Lanka will have to pay to get it.

The Chinese ambassador stated that China had only wanted 51% of the Hambantota project. The Yahapalana government had urged it to take a bigger share. Dayan Jayatilleke checked on this and two ministers had confirmed that this statement was correct. Dayan was also told that a better option of renting the land at USD    50,000 per hectare per month had been presented to the cabinet subcommittee but instead the subcommittee had preferred to ask China to take a higher percentage of ownership.

Further, two Chinese owned companies made rival bids to take the Hambantota Port on a 99-tyear lease. The China Harbour Corporation put in a bid that was favourable to Sri Lanka and China Merchant Co put in a bid that was not so favourable. The Chinese government obviously expected the Sri Lankan government to accept the China Harbour Co bid but the less favourable bid was accepted.

Yahapalana also planned to privatize the harbour operations, as well as hand landlord rights over the entire 2,000 hectare port,   including a 44 hectare artificial island outside the Port, to China. China would then be able operate the entire Port and have complete control over the industrial zone as well. Investments for the third stage terminals and cranes will be made by China and Sri Lanka will not have to put in the cash.

Critics observed that no other income is to accrue to the government or the Ports Authority for the next 15 years, and even after that the Ports Authority will receive dividends only on their 20% stake; and that too, only if profits are made and dividends are declared by the Chinese shareholder. For a decade and a half there will be no income accruing to Sri Lanka from the Chinese company in Hambantota Port, but Sri Lanka will be obliged to continue to service the Chinese debt.  That is not all. The original Hambantota Port master-plan had provision for the construction of another 20+ berths in the years to come, and the rights over those berths too, seem to have been promised to China.

The security arrangements within the Hambantota port, the employment of people, cargo etc, would all be the responsibility of the Chinese company. The company can employ who they want.  They are taking the assets not the liabilities, observed critics. Until the port reaches 50 percent capacity, Sri Lanka is prevented from developing another terminal with 100 km radius. None of these was part of the original deal, observed G.L.Pieris

There was strong opposition to this plan. The leasing of the entire Hambantota Port and its surrounding real estate for 99 years and handing over a highly sensitive industrial zone to a foreign private company is an action that will deprive the economy of the massive future potential of this Port, and that too, for a very small consideration, said angry commentators. The    government should renegotiate the terms of loans, reduce the interest rates, and ask for more time to repay loans. Sri Lanka Ports Authority (SLPA) had raised about 30 concerns on matters like the valuation method on the Rs.2500 per perch proposed as opposed to the current figure of $50,000 per hectare.SLPA wanted to operate the port without handing it over to a third party. They had plans for it.

The Sri Lankan government has now asked for the renegotiation of the lease period in the Hambantota Port Agreement. We have asked that it be reduced from 99 years and the China Merchant Port Holdings Company is looking into whether they can achieve the same results with the current model or change it to a different one if the time period of the lease is to be changed,”  It can now be anything between 50 and 70 years. Similarly, the shares could be 60% (Chinese company) and 40% (Sri Lanka Government).

It was clear from the beginning that the construction of the Hambantota harbor would mean greater Chinese involvement in that part of Sri Lanka. Hambantota was to be a hub servicing the shipping route across the Indian Ocean. One of the main nations serviced by those shipping routes is China. The Hambantota Port has become a sensitive area of China-Sri Lanka relations.  (CONTINUED)

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