"China got Sri Lanka to cough up a
port," said the New York Times in a widely quoted article published on
June 25, 2018.The article claimed, "Every time Sri Lanka’s President
Mahinda Rajapaksa turned to his Chinese allies for loans and assistance with an
ambitious port project, the answer was yes.
"Yes, though feasibility studies said the
port wouldn’t work. Yes, though other frequent lenders like India had refused.
Yes, though Sri Lanka’s debt was ballooning rapidly under Mr. Rajapaksa,"
the paper asserted.
The Sri Lankan government has long wanted to
build a seaport in Hambantota. Two feasibility studies were conducted before
the Sri Lankan government embarked on the ambitious Hambantota port project
according to Sri Lankan media reports.
The first feasibility study was completed in 2003
by a Canadian engineering firm, SNC-Lavalin. However, it was rejected by the
ministerial task force on the grounds that it was not bankable and was
incomplete since the study overlooked the port’s potential impact on Colombo
Three years later, Ramboll, a Danish consulting
firm undertook a second feasibility study and adopted a more optimistic view of
the potential of Hambantota Port. It projected that dry and bulk cargo would
constitute the main traffic for the port until 2030. Hambantota Port was
expected to handle approximately 20 million twenty-foot equivalent units by
On December 26, 2004, a magnitude 9.1 earthquake
with its epicenter off the west coast of Indonesia’s Sumatra Island triggered a
series of deadly tsunamis across the Indian Ocean, killing an estimated 230,000
people in 14 countries. The 2004 Indian Ocean earthquake occurred with the epi
centre off the west coast of Sumatra, Indonesia. . Indonesia was the
hardest-hit country, followed by Sri Lanka, India, and Thailand.
Sri Lanka was the second hardest hit. The strong
waves wiped out entire villages and townships in the south and east coast of
the island nation, caused 30,000 reported deaths, damaged highways and
railways, destroyed schools and hospitals and left 900,000 people homeless.
Hambantota, a bustling southeastern coastal town known for its salt production,
was completely devastated.
Hambantota is home to Mahinda Rajapaksa, the
sixth president of Sri Lanka, and his electoral district. When coming to power
in November 2005, he wasted no time in launching several big-ticket
infrastructure projects to revitalize the economy of his hometown. Hambantota
Port, a project first mooted by his father, was one of them.
The US think tank the Center for Strategic and
International Studies, affirmed that Hambantota Port was not a China-initiated
project. In fact, Hambantota Port was constructed long before the Belt and Road
Initiative (BRI) was launched in 2013.
India was the first country Rajapaksa turned to
for financial help to build Hambantota Port. However, his request was rejected
as India deemed the project economically unviable. The multilateral development
banks were also unwilling to lend their support to the project.
China saw the potential of Hambantota Port, which
strategically lies a mere 10 nautical miles north of the busy Indian Ocean
international shipping route. It not only meets the logistical needs of China’s
burgeoning global trade, but also serves as a transshipment hub and a supply
base providing bunkering facilities to the large number of vessels plying one
of the busiest shipping routes in the world. India’s relaxation of its cabotage
rules in May greatly enhanced Hambantota’s status as the transshipment port for
goods destined for the subcontinent.
Exim Bank of China eventually agreed to fund 85
percent of Hambantota Port’s Phase 1 construction costs after much negotiation.
The 15-year commercial loan of $306 million carried an interest rate of 6.3
percent with a four-year moratorium.
The Sri Lankan team did try to seek a
preferential loan from China, but the quota of China’s preferential loans then
to Sri Lanka had been used for the Norochcholai Coal Power Plant and other
Sri Lanka was given two options for the interest rate:
A 6.3 percent fixed rate or a floating rate pegged to the London Interbank
Offered Rate, which was over 5 percent then and trending higher. In October
2007, Sri Lanka issued a Fitch BB-rated, 5-year sovereign bond at 8.25 percent,
not a surprising move for the island nation that was still mired in a prolonged
civil conflict with the Tamil Tigers.
Exim Bank of China later provided additional
loans totaling $900 million to finance Phase 2 of the Hambantota Port project
at 2 percent, a preferential rate enjoyed by 77 percent of Chinese loans to Sri
The construction work for Phase 1 of Hambantota
Port, undertaken jointly by China Harbour Engineering Company (CMPH) and Sino hydro
Corporation, commenced in January 2008. The port became operational on November
18, 2010, five months ahead of schedule.
However, Hambantota Port was unable to generate
sufficient revenue to meet its loan obligations due to inadequate governance,
lack of commercial and industrial activities, as well as its inability to
attract passerby vessels to dock at the port. By the end of 2016, it suffered a
total loss of 304 million.US Dollars
Amid mounting pressure to meet the International
Monetary Fund’s bailout terms and loan repayment obligations, the Sri Lankan
government struck a public-private partnership (PPP) deal with China in July
2017, giving majority control of Hambantota Port to CMPH, which is listed on
the Hong Kong Stock Exchange (HKSE).
The concession agreement went into effect on
December 9, 2017. To increase industrial and commercial activities at the port,
China further undertook to develop a 50 sq. km economic zone and build a
liquefied natural gas plant and a tourist dockyard. China will also invest
between $400 million to $600 million to develop phase 3 of Hambantota Port
which is expected to be completed by 2021.
Sri Lanka had a dream; its government had a
vision: To turn strategically-located Hambantota into one of the busiest ports
in the world. When its neighbor turned its back, when the MDBs were cold to the
project, China provided the funding and built Hambantota Port with good
According to a recent report by the Financial
Times, "China’s development banks—the biggest lenders in the sector
worldwide—are ramping up co-operation with overseas financial institutions
after problems with international investment projects."