Infrastructure: Sri Lanka's debt to China

The prospect of large investment in a country desperate to catch up with its neighbours is doing little to ease anti-Chinese sentiment.

"We have a saying here in Sri Lanka,” comments an engineer working on Sri Lanka’s first expressway. “Japanese prices high, quality good; Chinese prices high, quality bad.”

There are many issues working for a Chinese contractor, the engineer told FinanceAsia.

He cannot communicate with the labourers since 80% of them are imported-Chinese workers. He also believes the contractor is taking shortcuts to boost its profit margins at the expense of Sri Lanka’s development.

“It takes a week for cement to set properly,” he explained. “The Chinese are doing it in two days.”

The road in question is Sri Lanka’s Southern Expressway. When the final leg is finished around 2020, the expressway will run from megacity-to-be Colombo to Hambantota, the power base of former president Mahinda Rajapaksa who tried to turn it into the country’s second major city.

He built a port ($1.5 billion) and international airport ($209 million), plus a host of other infrastructure and new roads, which still have a heavy concentration of cows to cars.

None of these projects are generating a return, but plenty of interest payments for Rajapaksa’s former paymaster: the Chinese government. Rajapaksa turned to China after multilateral agencies shunned the country because of high Tamil civilian casualties at the end of the civil war in 2009.

Estimates of just how much the country owes China vary, but recent IMF figures show external debt rose by about 10.4% of GDP over 2011 and 2012, or $6.9 billion.

One banker also noted, “The Chinese loans carry 2% interest payments, which doesn’t sound too bad. But the real issue are the hidden fees and over-invoicing, which underlie these projects.”

This debt burden tipped Sri Lanka into a balance of payments crisis, which it is now coming out of under IMG tutelage. Partial resolution has come from debt-for-equity swaps with China.

Earlier this year, China agree to purchase an 80% stake in Hambantota’s port, plus a 1,235-acre adjoining plot for a special industrial zone in return for writing off $1.12 billion China Exim Bank debt. As of early May, the final agreement has yet to be signed following Sri Lankan government pressure to improve the profit sharing arrangements. 

In the capital, China already has a 35-year lease on Colombo’s South Container Terminal and is developing a 269-hectare plot into Colombo’s International Financial City. Again this revolves around a 99-year lease: the same timeframe Britain forced China to sign over Hong Kong’s New Territories for in 1898.

China never forgot the perceived humiliation and the irony is not lost on Sri Lanka, which is only finally starting to fulfill its development potential after centuries of European colonial domination followed by a 23-year civil war. The desire to make up for lost time is overwhelming, but on Sri Lankan terms.

Many want to become India’s Hong Kong, not China’s colony as one local politician has dubbed Hambantota.

It was, therefore, not surprising when protests turned ugly after Sri Lanka’s prime minister and the Chinese ambassador laid the foundation stone for Hambantota’s Sri Lanka China Logistics and Industrial Zone (SLCLIZ) in January. Locals mistakenly thought China would own the whole 15,000-acre zone the government has earmarked under its Southern Development Plan.

The government blamed Rajapaksa and his politician son, Namal, for organizing the protests and stirring up trouble. The Chinese ambassador, Yi Xianliang, pointed out that China could plough $5 billion into the area over the next few years. By contrast, Sri Lanka attracted just $683 million FDI in 2015.

Krishan Balendra, CEO of John Keells' retail and leisure operations, believes it will be good for jobs.

“Our economy can’t rely on tourism and garment manufacturing alone,” he stated. “The country needs more FDI and these ports give Sri Lanka a huge competitive advantage because of their location at the mouth of the Indian Ocean.

“China wants to shift manufacturing closer to its end markets,” he added. “This SEZ will facilitate the factories, which the port can serve.”

Prime Minister Ranil Wickremesinghe has also sought to allay concerns about China shipping in its own workers. The wider Southern Development Plan could create one million new jobs for locals as companies from all over the world set up there, he said.

Maintaining good relations with all the competing players in the Indian Ocean is one of the government’s chief strategic aims. As such, the focus is now turning to a third port in the formerly war-ravaged East at Trincomalee.

But this time, it is long-standing allies, India and Japan, being tapped for help.

This article has been updated since first publication with details concerning the delay signing the Hambantota port agreement. 


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