Article: What Happened with China’s seizure of the Sri Lanka Port of Hambantota

In Articles, Business & Commerce, Foreign Affairs & Geopolitics by TechnoOwl

On Monday, June 25, 2018, the New York Times published an article entitled “How China Got Sri Lanka to Cough Up a Port”. In the article, the writer alleged that China strong-armed or otherwise coerced Sri Lanka into proceeding with the project and taking on loans with excessive interest rates even though feasibility studies showed it to be economically unviable. The article implied that the Chinese did this with the full knowledge that they were building a “port to nowhere” with the intention of later repossessing the port when Sri Lanka inevitably defaulted on the debt. The author concludes the article by stating that China demanded that the Hambantota Port and 15,000 acres of land be “handed over” to it for a period of 99 years.

New York Times “How China Got Sri Lanka to Cough Up a Port”

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  • Two independent, third-party consults conducted feasibility studies at various points in time and they both concluded the Hambantota port project to be economically feasible. One study was conducted by Canadian consultancy and engineering firm SNC Lavalin in 2003 under the Wickremasinghe government. The other was commissioned by the Danish consultancy Ramboll in 2004 and completed in 2007 under the Kumaratunga government. Both firms, under different administrations, independently concluded that the port was feasible.
  • “Port to nowhere”: Hambantota port is situated 6-9 nautical miles from the between the Malacca Straits and the Suez Canal which links Asia and Europe. It’s one of the busiest and most important shipping lanes on the planet Capturing even a fraction of this shipping traffic would be a tremendous boon to the Sri Lankan economy.
  • The original loan was accepted at the LIBOR benchmark rate plus 0.75%. During the following years, the LIBOR rate increased, pushing the initial loan up to 6.5% which was subsequently negotiated down to a fixed rate of 6.3%. The remaining balance of the loan (one billion USD) was offered by China at a concessionary interest rate of 2%. Taking into account the price quoted by the Chinese contractor responsible for construction, Sri Lanka could not have obtained cheaper financing terms for the project. In fact, the final cost of Hambantota Port was constructed at a cost that was less than the cost estimated by both Ramboll and SNC Lavalin feasibility studies.
  • Sri Lanka pays an average interest rate of 6.3% on its sovereign bonds and the principal on these bonds must be repaid on average within a seven-year period. China on the other hand has been lending to Sri Lanka at an average rate of 2% with an average repayment window of 20 years. This contradicts the claims that China provided financing for Sri Lanka at unsustainable, predatory rates.
  • China holds an estimated 9-15% of Sri Lanka’s external debt in total. The rest of their sovereign debt consists of high-interest loans from mostly Western commercial banks. International sovereign bonds of which the U.S owns a 66% stake, accounts for half of Sri Lanka’s external debt. Payments of the principal and interest for the Hambantota Port comprised only 1.5% of Sri Lanka’s external debt obligations due at that time. Sri Lanka paid their obligations on time using revenues from Colombo Port.
  • Sri Lanka had no problems financing the debt: “The total cost of financing the Hambantota port (capital plus interest) will be USD 1,761 million by the time the loan expires in 2036. By the end of 2016, nearly USD 500 million of this total amount had already been repaid. There was never any problem with meeting the payments for the Hambantota port because it was paid out of the profits of the Sri Lanka Ports Authority (SLPA). The Auditor General’s report for 2014 states that the profit of the SLPA in 2014 after paying all loans and taxes was Rs. 8.8 billion.” – Mahinda Rajapaksa, leader of the Sri Lankan opposition party and former President of Sri Lanka.
  • Under the terms of the lease agreement, Sri Lanka still retains complete ownership of Hambantota port. In addition, China agreed to pay the Sri Lankan government a $1.12 billion dollar leasing fee with the obligation to continue investing in and upgrading facilities there as well as taking over the day to day operations. The primary motivation for leasing the port to China was not to repay Chinese debt using the leasing fee but to pay off more expensive debt borrowed from Western entities.
  • There is no Chinese military presence in Hambantota port. The port’s security is provided solely by the Sri Lankan Navy, which has established its southern naval command there.
  • In a report commissioned by the U.S State Department which coined the phrase ‘debt-trap diplomacy’, the author concedes “Sri Lanka reached out to Japan, India, the IMF, the World Bank, and the Asia Development Bank to fund the construction of a major port in the undeveloped backwater of Hambantota, but was denied funding amidst concerns about human rights and commercial viability.” Sri Lanka was essentially turned down by every major world lender and could not secure finances to build its economy until China stepped in.