Why Chinese Loans to Sri Lanka are Well Worth
Posted on October 13th, 2020
Dilrook Kannangara
Summary: At Least 40% of Chinese Loans to Sri Lanka Had Immediate Economic Benefits to Sri Lanka Private Sector
All Chinese loans to Sri Lanka are for the construction of valuable physical assets. Even if only 40% of those projects are given to Lankan organisations and individuals, that is highly profitable. In other words, 40% of the loan that was taken for the project has immediately come back to Sri Lanka’s private sector by way of labour and material purchases. It is true the government holds 100% of the project debt. But when taken as a nation as a whole, only 60% of the loan that equates to the portion of the project given to Chinese contractors is a net outflow from Sri Lanka with interest. Even for them, an equal amount (60%) of services have been received by Sri Lanka. Once the project is complete, the net outflow of 60% is covered by economic benefits earned and costs saved from the physical asset constructed. Therefore, Chinese loans are doubly beneficial to Sri Lanka. However, it gets even better!
Background: Thank You American Ambassador for Saying 40% of Chinese Loans Immediately Benefitted Lankan Private Sector
In a recent interview with Daily Mirror, U.S. Ambassador to Sri Lanka Alaina B. Teplitz mentioned the following:
[Quote] A 2019 World Bank study concluded that more than 60% of People’s Republic of China (PRC)-funded Belt and Road Initiative (BRI) projects are allocated to Chinese companies and stressed that tender processes are opaque. [Unquote]
Well madam ambassador, what about the remaining 40%?
Even she agreed that it comes back to the host nation (Sri Lanka) at the time the project asset is constructed. For instance, if a certain Chinese project costed $1.5 billion, $0.6 billion of it immediately came back to Sri Lanka by way of Sri Lankan labour and material purchased from Sri Lanka even before the asset was constructed in full! That’s an enormous economic injection to the Sri Lankan private sector. That’s not all. Chinese labourers working on the project consume goods and services in Sri Lanka while they are stationed. They pay for their food, rent, entertainment and travel locally which is an added boost to Sri Lanka’s private sector. Although the amount cannot be quantified and totaled, it is substantial.
Then the asset is constructed and operated it generates income directly and indirectly. Direct income (for instance the Southern Expressway, Katunayake-Colombo Expressway, Colombo South Port Terminal, powerplants) is recorded while indirect income earned by the nation’s private sector is not quantified. Chinese built infrastructure also leads to cost savings that are not quantified. For instance, although the Mattla Airport is not making profit, Sri Lanka saves a massive amount of money by having a second international airport. Planes need not be diverted away from Katunayake International Airport (KIA) to Indian airports after Mattala came into operation. Essential and preventive repairs of KIA can be carried out without any disruption to air traffic. This was never the case before Mattala International Airport.
When considered as a nation, all Chinese loans are profitable.
The Confusion: Government Taken Separately from the Nation as a Whole Gives the Wrong Impression
Confusion prevails when looked at the loan purely from the government point of view. The government is liable to repay the full loan and interest. That includes 40% of the project cost that came back to Sri Lanka’s private sector, goods and services purchased by Chinese workers in the island and paid by them to the private sector and indirect economic benefits earned by Sri Lanka’s private sector during the construction stage.
This is what ails Indian, American and NGO lobbies. They conveniently forget the massive economic benefits already earned by Sri Lanka’s private sector (40% plus much more) even before the project is complete. They also forget indirect economic benefits that are continued to be earned by the private sector after the project asset is operational.
It is not that they forget these; they maliciously disregard these benefits to Sri Lanka.
Debt Trap: The Unfortunate Leftover of US and Indian Pushed Reconciliation
Sri Lanka is sadly in a debt trap. This is not due to Chinese loans as Chinese loans have already showered Sri Lanka with more than 40% of the loan value as private sector economic benefits even before project completion! Debt trap is due to commercial bonds issued in various western capitals at commercial USD bond rates. These are Sri Lanka Sovereign Bonds and Sri Lanka Development Bonds. They have no identifiable physical asset and most went for reconstruction of the north and east, reconciliation and resettlement of Tamil IDPs until 2013. Since then most monies raised by new bonds were used to repay old bonds and interest. Interest rates vary from 6.75% on USD to even 10%. These debt holders are individual investors in the EU and the US. Worth mentioning again: these debt holders are individual investors in the EU and the US.
Indian debt also falls into this category as Indian debt including currency swaps have no construction of physical assets that generate income. What’s more, most destruction to the environment is caused by Indian funded projects like housing projects for Indian Tamils in environmentally vulnerable hill country which is the catchment area of most rivers and most endangered wildlife. The recent spike in leopard encounters and unfortunate killing of a large number of leopards is the direct result of these invasive and useless Indian projects.
No wonder, the US ambassador avoided mentioning them!
Comparing Lease and Other One-Sided Deals
In addition to loans, Sri Lanka has entered into lease and other agreements with China, India and USA. Hambantota Port and Port City have leases entered with Chinese companies. These are profitable to Sri Lanka as the Chinese companies pay a lease rent and share profits of commercial ventures they carryout with a Sri Lankan stake. For instance, Sri Lanka Ports Authority has a significant stake in the Hambantota Port. Efficiencies of Chinese management result in profit for the Sri Lankan shareholding too.
However, this is not the case with the leases Sri Lanka entered into with India over the Trincomalee oil tank farm. The lease rental is not worth it and an Indian company is using tanks for its commercial ventures in Sri Lanka with no return to the island by way of a profit share or tax on profits or assets.
Same goes for assets leased and continue to lease to USA. There is no profit share or tax income for Sri Lanka.
In addition to these, Sri Lanka has entered into military deals with USA and India that binds Sri Lanka to provide logistics facilities to them. One example is ACSA. Unfortunately, these deals are not with the paper they are signed in! Providing them logistical facilities including airlift by SLAF is not cheap but the agreement states they are either not paid for or paid a very nominal amount. In 1987 Sri Lanka entered into the Indo-Lanka Peace Accord which imposed worthless white elephants called provincial councils. They continue to bleed the Lankan economy with no benefit whatsoever.
Therefore, even on the leasing front Chinese deals are far more profitable to Sri Lanka than US and Indian deals.
Way Froward: Review All Commitments Economically and Politically, Retain the Beneficial and Scrap the Unprofitable to Sri Lanka as a Nation
Impact of the debt trap has been worsened by the COVID-19 induced economic crisis. Sri Lanka must critically evaluate all its deals particularly with foreign parties and their resultant local matters. Provincial Council system must be done away with immediately as it is a massive white elephant. Indo-Lanka Peace Accord must be rescinded officially. India-Sri Lanka lease agreement over Trincomalee oil tanks must be scrapped as it offers no economic benefits. Progressive taxes must be imposed on all foreign owned commercial ventures in Sri Lanka where they compete against local entities, especially government entities. Property in Sri Lankan owned by Sri Lankans living in foreign nations as their permanent residents or citizens must attract a tax on property value and government pensions paid to Sri Lankans residing abroad must be reduced or removed. These are tough measures that are essential to meet tough economic challenges faced by the nation. China is the hen that lays golden economic eggs and further inroads must be made for Chinese investments in the island. At the same time no country should be allowed to dictate terms to Sri Lanka and influence Sri Lanka’s policy matters. Sri Lanka is an independent, sovereign and proud nation that is more than capable of own policy decisions.