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On June 22, 2022 the Committee of Public Enterprises (COPE) was told that the Yahapalana Government had not utilised the USD 1.1 billion received in 2017 for the leasing of Hambanthota International Port to China Merchants Port Holdings Company to settle the loan obtained for constructing it. Seventy percent stake of the Port was leased for 99 years amidst public protests. The stated purpose of leasing this strategic assert was to settle the loan.

The Hambanthota Port was planned and designed by the Sri Lanka Ports Authority (SLPA), though constructed by Chinese companies – China Harbour Engineering Company and Sinohydro Corporation. As such, the loans for this project was undertaken and serviced by the SLPA. Therefore, the money received from the Port should have been utilised by the SLPA to repay the loan.

Instead, the COPE learns that the SLPA, the entity that was servicing the debt in question, had given the money received from the lease as well as the balance of its foreign debts to the Treasury. Furthermore, all records of this loan, including the bank interest balance (Rs 147,746 million) and foreign reserve loss (Rs 31,545 million) had been removed from the SLPA accounts without the approval of the Treasury or the Cabinet.

As the COPE was told, the Treasury without utilising this money to service the said loan had used it for other purposes because the debt interest was low. Since then, the Treasury had repaid the Port’s loan and interest in instalments.

In simple language, up until 2017, the SLPA was repaying the loans taken for the construction of the Hambanthota Port. Then, 70 percent of the Port shares were leased to a Chinese company in 2017. The purported objective of the lease was to settle the loan taken by the Mahinda Rajapaksa Administration to construct this Port.

After the Port was leased, the debt and the monies received from the lease were transferred from the SLPA to the Treasury. The Treasury however does not use these funds to settle the debt but for other purposes. The loans and its interests are now being serviced by the Treasury in instalments.

This means, before the lease it was the SLPA that was servicing the loans taken for the construction of the Hambanthota Port. Since the lease, it is the tax payer who is servicing these loans. These loans are still in existence and not settled off in 2017 as the public was led to believe.

This revelation challenges a number of criticisms established against the Hambanthota Port. It is widely considered as a white elephant that we could ill afford. With the Colombo Port already in existence, this second sea port is considered by many to be highly unnecessary.

However, now it is exposed that contrary to popular belief the Chinese loans were with low interest rates that we could well afford. Then, comes the question of the need of this elaborate falsehood that Sri Lanka was forced to lease it back to China. With the shattering of the established story comes the question as to the real reasons that compelled the Yahapalana Government to lease the Port to China in the first place.

Colombo Port

White Elephant or White Lie

The Hambanthota Port was not a white elephant. Likewise, leasing the Port in the guise of settling the loans taken for the Port’s construction was also not a white lie. It was a diabolical falsehood.

The Hambanthota Port Development Project, which was designed as a green field free port, was planned and implemented under the SLPA Maritime Agenda. This was the most critical and largest project undertaken by the SLPA.

Contrary to popular belief, Hambanthota Port was not an ad hoc politically motivated project. It had been in the cards since the early 1900s. Successive governments have attempted to initiate this project and had even got two renowned port consultancy agencies – SNC LAVALIN Int (2001-2003) and RAMBOLL (2004-2007) to conduct feasibility studies.

Feasibility of constructing the Hambanthota Port

The prohibitive factor was the cost. According to the feasibility study carried out by SNC LAVALIN INTERNATIONAL in June 2003, the cost indicated was USD 1,050 million. The RAMBOLL feasibility study undertaken in January 2007 indicated an investment of USD 1,328 million.

After carefully studying both feasibility studies, the SLPA managed the Port’s construction at a cost of USD 1,350.8 million. The construction began on January 15, 2008 and was completed in 2015. See Table 1

Though political payoffs have been insinuated, the construction was primarily based on measure and pay strategy, thereby avoiding unnecessary political enrolments and high costs followed in lump sum strategy of payments. Contracts based rates are a bottom-up approach to pay specifically on the work completed during an arranged time frame. This leaves zero space for corruption or political influences.

SLPA Management had taken heavy precautions against any possibility of manipulating numbers during the initiating stage or when deciding the rates by using SLPA employees to carry out engineering, consultancy and surveying services. This approach allowed the SLPA to closely monitor the development and the quality of service provided by the construction companies.

Furthermore, SLPA was able to save more than 10 percent of the project cost as these services were carried out by the existing qualified professionals and talented staff attached to the SLPA rather than outsourcing. Amongst the SLPA team were Chartered Engineers and professional surveyors, who were determined to justify every cent of the investment.

Necessity for a Sea Port in Hambanthota

The geopolitical interest is again reverting to Asia as the region of booming economy. As such, Hambanthota had been identified as the location with the least deviation from the East-West shipping route. Apart from the deviation time, numerous other crucial facts as environmental concern, population density and urbanisation, fertile and cultivated land availability, coastal and fishing activities in the region, availability of unused land that could be released to industrial activities and favourable coastal features decided Hambanthota as the best location for the construction of a new port.

Part of the skepticism harboured over the Hambanthota Port is the necessity for a second port. Why the Colombo Port cannot be enhanced instead of investing in a brand new port has been a persistent question.

Even though the Colombo Port is a well-established international transshipment hub port, it is not without its limitations. This port situated in the midst of the commercial capital of the Island is at a location that is already congested, disallowing any expansion towards the land-side. Hence the Colombo Port Expansion Project (CPEP) was constructed from land acquired from the sea.

Still, according to the volume projections CPEP would also reach its maximum capacity by 2020. This created an enormous requirement for a second sea port in an alternate location to sustain the long term maritime hub operations within the region.

The Hambanthota Port project includes a free zone, which is a modern trend in the logistics industry. The intention was to position Hambanthota as a bunkering hub, which is a highly profitable business. Benchmarking with Singapore and Dubai port operations, far reaching plans as ship building with a fully fledged dockyard facility and other devices as providing ship chandelling, ship stores, crew changes, supply of quality freshwater, waste reception and several other efficient vessel oriented services to enlarge the Port’s businesses was in the cards.

Strategic Investment or Debt Trap?

The two main allegations against the Hambanthota Port have been that it has been a debt trap unable to produce a return on investment. The Port has been repeatedly ridiculed as a port without ships. It has been alleged that the Chinese loans were with extremely high interest rates. Coupled together – high interest rate loans without business – the county was said to be haemorrhaging money to repay the debts.

The ultimate story is that China forced the asset out of our hands when it came to the point we could no longer service the loan for a project that was not making any money. However, the truth is far removed from these misconstrued narratives.

Port operations, which generally involve a large investment, require loans to maintain uninterrupted cash flow for construction work, purchase equipment as well as to maintain working capital. So it was with the Hambanthota Port project as well.

It is noteworthy at this point that Sri Lanka’s first choice to finance this project was India. Though India showed some interest, they never committed to the project. Even after six months of relentless persuasion from the Sri Lankan counterpart, India remained noncommittal. China on the other hand agreed to finance in the first meeting itself.

Though Chinese loans have been criticised for its high interest rates, this is actually half the story. See Table 2

It was only the interest rate of the first loan that was taken during the height of the war against terrorism that was 6.4 percent. All subsequent loans were taken at the lowest interest rate that could be obtained for such a large investment.

Interest rate is just one criteria considered when a project loan is obtained. The contractor quoted price had also been considered for this project was carried out with a bilateral agreement between China and Sri Lanka. It is noteworthy that the annual weighted average interest rate for total loans was accumulated as 3.07 percent. This proves that the impact of the initial higher interest rate was minimum for the overall project.

High interest Chinese loans was not the only falsehood against the Port. The derision that the Port was without ships was exposed for its untruth during the unrest that followed the news that the Port’s controlling share was offered to China.

There was a huge public outcry against the deal. Port workers too, fearing for their jobs, launched a flash strike. During this fracas, Hyperion Highway – a 5,000 vehicle carrying Japanese vessel – got inadvertently detained at the Port.

The four-day protest was only broken up after the Sri Lanka Navy’s dramatic intervention, who entered the Port via the sea and fired warning shots to disperse the crowds. The then Sri Lanka Ports Minister Arjuna Ranatunga commenting on the protests noted that while some ships bound for the Hambanthota Port were diverted to the Colombo Port, others skipped Sri Lanka altogether and may never return.

Other news items such as the arrival of MV Hoegh Tracer, the world’s largest Pure Car and Truck Carrier to the Port in March 2017 also refuted the falsehood that the Hambanthota Port was without clients.

It is very clear that the Hambanthota Port is indeed a strategic asset with great potential. The loans were not prohibitive. According to the Auditor General’s report on the SLPA’s revenue generation, 2014 saw an increase of Rs 37.4 billion from the Rs 25.9 billion in 2007. SLPA’s net profits in 2014 was Rs 8.8 billion against the loss of Rs 2.7 billion in 2007. During the span of six years, the SLPA’s cash reserves increased from Rs 4.5 billion in 2008 to USD 165 million in 2014. Had the Hambanthota Port been a drain on SLPA’s finances, these figures would not have been possible.

Why was the Hambanthota Port Leased?

This brings forth the real reason for the Port to be leased.

The simplest reason was that the Yahapalana Government was cash strapped after honouring the 2015 election pledge to increase public sector salaries by Rs 10,000. This was a huge bill that cost the Government coffers over Rs one billion per annum. This is roughly the same cost it took to build a brand new port.

This is a very good lesson to the entire nation. We believe and demand salary increments from the government to meet our cost of living. However, salary increments do not ensure a better living standard. Instead, it actually makes us poorer as all related costs and expenses linked with those costs also increases accordingly.

Increasing salaries did not bring any economic freedom. It only forced the government to privatise a strategic asset and forego all investment benefits and plans that the asset had in store for us. At the end of the Yahapalana Government’s tenure, GDP was the lowest in the region at just two percent.

The only way for a better living standard is to increase our productivity and the quality of our output. Money is not a commodity or even a guarantee but only a promissory note for a product or service we may obtain in the future. The actual value comes only from the quality of the product or service, which makes productivity and not money the key to a better life.

There are a number of theories for the Yahapalana Government to insist exclusively on a Chinese investor to lease the Port. The bottom line however is that China never demanded the Port. Hopefully, in the subsequent COPE hearings it will come to light that out of the two offers China made for the Port, the Yahapalana Government chose the least favourable one for Sri Lanka. Sri Lanka deserves the answers for these two questions – why only China was solicited and the reasons for selecting the least favourable offer.

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