China’s debt trap? The true story of Hambantota port

[TaiShang]

China’s debt trap? The true story of Hambantota port

By Xu Wenhong Source:Global Times Published: 2019/5/20

Illustration: Luo Xuan/GT



The fate of Hambantota port, which the Sri Lankan government leased to a Chinese firm for 99 years, has been hotly debated since the launch of the Belt and Road Initiative (BRI).

Western experts and media have used the port as proof that China is using the BRI as a tool for creating a debt trap and gaining ownership of vital infrastructure.

The proposed Hambantota port was expected to relieve pressure on the Colombo port and to provide services to ships that detour to secure services such as refueling, maintenance, logistics and buying provisions and medical supplies.

India was the first country Sri Lanka turned to for financial help to build Hambantota port. However, the request was rejected as India deemed the project commercially unviable.

When costs for the first phase were being discussed in 2006-07, Sri Lanka did try to seek a preferential loan from China, but China was unable to provide as funds were already dedicated to other projects at that time.

Sri Lankan officials instead negotiated a commercial rate based on the London InterBank Offered Rate (LIBOR), which was around 5.5 percent and rising. After many negotiations, Export-Import Bank of China eventually agreed to fund 85 percent of Hambantota port's first phase construction with a 15-year commercial loan of $306 million at an interest rate of 6.3 percent, including a management fee of 0.3 percent.

Financing for phase two of the port of Hambantota was negotiated after the 2008 financial crisis, and the interest rate was much lower. The rate was around 2 percent when LIBOR was under 1 percent. The risk premium accorded to Sri Lanka was quite high at the time because of the ongoing civil conflict.

At no time did China put pressure on Sri Lanka to accept any specific terms or conditions, nor did they entice additional borrowing by offering low rates.

Sri Lanka Ports Authority (SLPA) operated the Hambantota port from 2012 to the end of 2014, a period that saw little traffic. Likewise, bunkering business failed to take off due to SLPA not having a strategic international partner.

Hambantota port was unable to generate sufficient revenue to meet its loan obligations due to inadequate governance, lack of commercial and industrial activities, and its inability to attract passing vessels to dock at the port. By the end of 2016, it suffered a total loss of $304 million.

There was a change of government in Sri Lanka in January 2015. The new administration suspended port operations, including bunkering. However, the four-year payment moratorium is coming to an end.

Amid mounting pressure to meet the IMF's bailout terms and loan repayment obligations, the Sri Lankan government struck a public-private partnership (PPP) deal with China in July 2017. The PPP is not a debt-equity swap but fresh investment by China Merchants Port Holdings Co.

At no time did China intend to take the Hambantota port. It was the Sri Lankan government that requested China bail out the Hambantota port after it incurred heavy losses.

Under the concession agreement, Sri Lanka did not confer any special status to the operators, either in terms of extraterritorial rights or fiscal regime. Sri Lankan Police, Customs, Navy and Emigration officials manage all vessels, personnel and cargo in and out of the port.

China neither enticed nor compelled Sri Lanka to borrow money. Currently, Sri Lanka's total sovereign debt stands at about $65 billion. China only accounts for $8.5 billion of the total foreign debt, of which Hambantota port is a mere $1.12 billion.

The Hambantota port's failure is mainly because Sri Lanka is an emerging country lacking management skill and an international cooperation network. Once these issues are overcome, Hambantota port is expected to have a very bright future.

When its neighbor and multilateral development banks turned their backs, China provided the funding and built Hambantota port with good intentions. The process reflected the BRI spirit.

A New York Times article alleged that China lured Sri Lanka into a debt trap under the BRI. However, we now know that the port project began in 2007, while the BRI was launched in 2013, and lending was not tied to any strategy.

The BRI is an initiative proposed by China, but it benefits others, too. It aims to strengthen economic cooperation, promotes the free flow of production factors, and optimizes resource distribution. At the same time, the BRI has become a target of criticism from vested interests and those with ill intent. The story of Hambantota was twisted, and China got the blame.

http://www.globaltimes.cn/content/1150711.shtml

 

[Arulmozhi Varman]

Its a self defeating article. The question is why China is investing in a "commercially unviable" project? Whose coffers did it fill to do this project? Hambantota is a fishing village. How could anyone develop a village with less population to suddenly grow into a city. Rajapakse had that fantasy and Chinese fueled that.

Chinese should have said NO to the project and asked for some other ones. But it did not.

 

[fallstuff]

5.5% is pretty steep. Why the loan was not recalculated at a lower rate once the hostilities ended ? Chine knew they are going to get their hands on the port , a port sitting on well traveled waterway.

 

[Menthol]

The potential of the port is huge.

But the situation in Sri Lanka is not possible to utilize it.

May be if the port was built in 2020, it will be more successful and smooth.

I think, many countries who can't get fund from the Western banks, seek China, but then blame China.

 

[JSCh]

Opinion: Underwater myth of Sri Lanka’s Hambantota Port deal - CGTN

...

How feasible and practical is it to build the Hambantota Port?

The Sri Lankan government has carried surveys and research regarding that matter in previous years.

During the time of former President Chandrika Kumaratunga, Danish engineering consultancy firm Ramboll did the first feasibility study, without finishing it. Another top engineering consultancy firm, SNC Lavalin from Canada, completed another study in June 2003.

In 2004, Ramboll was back in the picture and completed the study in 2007. This was under the second term of Chandrika Kumaratunga.

The conclusion of two feasibility studies under two different governments is clear and convincing: Build the Hambantota Port.

No assistance from India

For years, many observers have spoken of "India's worry" over the Chinese presence in the Hambantota Port. But separating facts from fiction is essential.

Sri Lanka had first looked to India for assistance to develop the Hambantota Port, but India declined.

A flourishing Hambantota Port, together with the booming Port of Colombo, will be strong competitors to India’s maritime facilities. Despite investing in Sri Lanka, India needs more FDI and loans to develop its own infrastructure.

But China's assistance with the project was subject to severe criticism from India and the West, even when Indian automobile exports to Sri Lanka were the first batch of goods when the port opened for business.

Is that fair?

...​

 

[TaiShang]

Chinese should have said NO to the project and asked for some other ones. But it did not.

Why should China say no? Because Sri Lankans are stupid?

Besides, who are the others? India?

Why would China let others, including India, do it when it can do it itself.

 

[武成王]

Its a self defeating article. The question is why China is investing in a "commercially unviable" project? Whose coffers did it fill to do this project? Hambantota is a fishing village. How could anyone develop a village with less population to suddenly grow into a city. Rajapakse had that fantasy and Chinese fueled that.

Chinese should have said NO to the project and asked for some other ones. But it did not.

Hongkong and Shenzhen were ever both small fishing villages. Chinese are magician as simple as that.

 

[ziaulislam]

Its a self defeating article. The question is why China is investing in a "commercially unviable" project? Whose coffers did it fill to do this project? Hambantota is a fishing village. How could anyone develop a village with less population to suddenly grow into a city. Rajapakse had that fantasy and Chinese fueled that.

Chinese should have said NO to the project and asked for some other ones. But it did not.

but china did it...all of the chinese power houses who GDP is even bigger than large indian states were merely fishing villages 2 decades ago

 

[GHALIB]

Its a self defeating article. The question is why China is investing in a "commercially unviable" project? Whose coffers did it fill to do this project? Hambantota is a fishing village. How could anyone develop a village with less population to suddenly grow into a city. Rajapakse had that fantasy and Chinese fueled that.

Chinese should have said NO to the project and asked for some other ones. But it did not.

That's true

 

[fallstuff]

Here are the hard facts.
Sri Lanka has a Port with no financial obligation and zero operating cost.

China has its hands on a port located on a strategically important waterway.

 

[ohmrlobalobayeh]

Hongkong and Shenzhen were ever both small fishing villages. Chinese are magician as simple as that.

this is correct. Singapore is such a case.

jsut a fishing village in the past

mass migration of Chinese from southern chinese coast to Singaproe

= SIngapore today

 

[Arulmozhi Varman]

Why should China say no? Because Sri Lankans are stupid?

Besides, who are the others? India?

Why would China let others, including India, do it when it can do it itself.

India as a country cannot invest in commercial projects. It can ask its companies to invest or even state owned ones. But they did an analysis and told an airport and an port in Hambantota is commercially unviable. Why will they even bother to invest and burn their money?
The problem is Hambantota is Rajapakse's native village and you do not a population to support such an infrastructure. I do not know on what basis did they calculate it will generate a revenue of 300m per year? On what basis transhipment companies will relocate to Hambantota? And why would Indian ships tranship from Hambantota when 70% of Indian goods are transhipped at Colombo? There is a lot of questions what was left unasked..

but china did it...all of the chinese power houses who GDP is even bigger than large indian states were merely fishing villages 2 decades ago

China has a huge population. Sri Lanka does not. And China did not get exorbitant loans to develop villages into cities when it was poor.

Hongkong and Shenzhen were ever both small fishing villages. Chinese are magician as simple as that.

China had the advantage of huge population. It had an obligation to create cities for its growing huge middle class. Its infrastructure was built gradually and not in a year or 2. And China did not get expensive foreign loans to develop these cities. Industries developed around Shenzhen first, people moved, it grew, infrastructure built and developed over 2-3 decades. Hambantota doesnt even have an industry.

I am pretty impressed by the growth of cities like Shenzhen but its unfair to compare itself to Gwadar or Hambantota.

 

[武成王]

China had the advantage of huge population. It had an obligation to create cities for its growing huge middle class. Its infrastructure was built gradually and not in a year or 2. And China did not get expensive foreign loans to develop these cities. Industries developed around Shenzhen first, people moved, it grew, infrastructure built and developed over 2-3 decades. Hambantota doesnt even have an industry.

I am pretty impressed by the growth of cities like Shenzhen but its unfair to compare itself to Gwadar or Hambantota.

There're industrial parks in Gwadar and Hambantota. You have stated the logic behind the growth of a brand new city, industries create jobs and immigrants. Sri Lanka has a population of 40 millions enough to create a special economically emerging city, let alone Pakistan.

 

[Godman]

There're industrial parks in Gwadar and Hambantota. You have stated the logic behind the growth of a brand new city, industries create jobs and immigrants. Sri Lanka has a population of 40 millions enough to create a special economically emerging city, let alone Pakistan.

Our population is slightly higher than 21 Million actually. Slightly less than Taiwa or Australia

There are several issues affecting Hambantota currently but I expect them to be solved before 2030 (or before 2025 if optimistic).
First is transportation links. Hambantota lacks a railway connection or a expressway connection which obviously affect the port.

The railway line to Hambantota will start construction work in the near future.
The project has 3 phases and the first phase was completed and opened this year.
Matara to Beliatta – 27 Kms
Beliatta to Hambantota – 48 Kms
Hambantota to Kataragama – 39.5 Kms

The Southern Expressway extension to Hambantota is nearing completion and should be finished by early 2020

 

[Brainsucker]

Our population is slightly higher than 21 Million actually. Slightly less than Taiwa or Australia

There are several issues affecting Hambantota currently but I expect them to be solved before 2030 (or before 2025 if optimistic).
First is transportation links. Hambantota lacks a railway connection or a expressway connection which obviously affect the port.

The railway line to Hambantota will start construction work in the near future.
The project has 3 phases and the first phase was completed and opened this year.
Matara to Beliatta – 27 Kms
Beliatta to Hambantota – 48 Kms
Hambantota to Kataragama – 39.5 Kms

The Southern Expressway extension to Hambantota is nearing completion and should be finished by early 2020

Can you tell us about Hambantota's lease?