Colombo, Sri Lanka Every day as dusk falls on Colombo, residents ock to Galle Face Green, a vast esplanade facing the beach and Indian Ocean beyond. Snack sellers serve refreshments from rickety tables while families and couples stroll by, hair and dupattas (scarves) uttering in the wind. One of the most popular parks in town, it’s a great place to people-watch, or just stare at the turbulent waters gleaming in the sunset. BEWARE BONANZAS Chinese investment aid to Sri Lanka has been a major success—for China By Ilaria Maria Sala • January 27, 2017 REUTERS/DINUKA LIYANAWATTE A port city in the works for China. Latest Featured Obsessions Emails Editions
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Colombo, Sri Lanka
Every day as dusk falls on Colombo, residents �ock to Galle Face Green, a vast esplanadefacing the beach and Indian Ocean beyond. Snack sellers serve refreshments from ricketytables while families and couples stroll by, hair and dupattas (scarves) �uttering in the wind.One of the most popular parks in town, it’s a great place to people-watch, or just stare at theturbulent waters gleaming in the sunset.
BEWARE BONANZAS
Chinese investment aid to Sri Lanka has been a majorsuccess—for China
Head north on the adjoining Galle Main Road, and the ocean is soon blocked from view bythe largest building site the area has ever seen: the $1.4 billion Colombo Port City project.The project will reclaim some 2 sq km (.77 sq miles) of land, on which will sit luxury �ats,of�ce buildings, and hotels, not to mention a theme park, marina, and golf course. For now,it is just an immense construction site.
Looming over the project, and indeed the entire Sri Lankan economy, is China. Chinese-funded investment and infrastructure have been pouring into Sri Lanka in the past decade.The biggest legacy of Beijing’s “help,” however, looks to be a debt-glut that will take at leasta couple of generations for the island nation to repay—and Chinese access to strategicIndian Ocean real estate for the next century or so.
“China lends money to countries so that they can build infrastructure that is built byChinese �rms,” said Christopher Balding, associate professor at the HSBC School of Businessat Peking University in Shenzhen. “Infrastructure is built. The money is sent back to Chinese�rms. The country now has new infrastructure, and a lot more debt.”
A lovely evening on Galle Face Green, with a new port city emerging in the distance.
The debt, in turn, can result in Beijing getting something rather useful innations with resources it covets: negotiating leverage to gain access to those resources,including land.
It’s a pattern seen in other countries that have long indulged in Chinese investments,including Venezuela and Cameroon. And it’s one likely to repeat as China continues work onits One Belt, One Road (OBOR) intitiative, designed to connect the Eurasian landmass byland and sea. That includes countries like Laos and Pakistan, both of which have indulged inChinese funding.
And while China has long practiced “checkbook diplomacy,” alarm bells are ringing (paywall)over the trail of debt being left behind.
Political repercussions
Beyond the mesh wire guarding the Colombo Port City project—with warning signs inSinhalese, Tamil, and Chinese—heavy machinery dredges, breaks rocks, and lifts boulders.
Diggers �ll trucks with sand. Chinese engineers look studiously at their printouts, whileworkers sweat under their helmets.
The project is under the supervision of China Communications Construction Company(CCCC), with its subsidiary China Harbour Engineering Company (CHEC) handling much ofthe workload. Until this month CCCC and all its subsidiaries were blacklisted by the WorldBank for corrupt practices, stemming from a project in the Philippines. That made itineligible for the past eight years to build bridges or roads backed by World Bank fundinganywhere in the world.
For Sri Lanka, that meant all the projects undertaken by CCCC involved no otherinternational credit institution like the World Bank—and ended up being entirely �nancedby China.
Balding likens China’s approach to Sri Lanka to the one that Chinese state �rms have towardnational infrastructure projects back home, which have generated signi�cant GDP growthwhile in�ating the ballooning domestic debt.
“In China, this �nancing model of building infrastructure and [worrying] about theassociated debt later is common,” he said. “Whether it’s airports, most of which lose money,or train lines, most of which require enormous subsidies to keep from exploding their debtburden.”
The Colombo Port City project, inaugurated by Chinese president Xi Jinping in 2014, was oneof the main deals signed by previous Sri Lankan president Mahinda Rajapaksa. Thecircumstances under which Rajapaksa agreed to the project were deemed so dubious thatthey contributed to his electoral defeat in the 2015 presidential elections, ending his 10-yearstint at the country’s helm. In a surprise upset, the popular vote went to the United NationalParty (UNP), as the electorate grew tired of a government renowned for human rights abusesand plagued by allegations of corruption, often involving Chinese investment deals.
After taking power in early 2015, current Sri Lanka president Maithripala Sirisena and hiscabinet were keen to reassess all the big infrastructure projects involving Chinesecompanies. The UNP formed a coalition government with the Sri Lanka Freedom Party, andthe new administration put on hold for reexamination the majority of the accords that hadbeen signed with China.
Xi Jinping and Mahinda Rajapaksa launch a port city.
The administration halted work at Colombo Port City by citing the need for a properenvironmental impact assessment. (CCCC complained about hefty losses as its machineryand laborers remained idle.) One issue Sirisena and his team sought to address: a generousfreehold given to China on 50 hectares of land in the Colombo port area. The newadministration negotiated that down to a more limited arrangement, but one Beijingprobably still didn’t mind: a 99-year lease on 110 hectares of reclaimed land.
As the new administration quickly discovered, the debt Sri Lanka contracted with China wasalready too big to work around. It now amounts to $8 billion; meanwhile, 95.4% of allgovernment revenue is currently going towards debt repayment.
The world’s emptiest airport
Not all of the China-fueled infrastructure in Sri Lanka (and other countries) is a whiteelephant: The Colombo International Container Terminal, also �nanced through Chineseloans and built by Chinese companies, is already pro�table.
But many of the projects are indeed of questionable use. Some of the most striking examplesare found around the southern city of Hambantota, the hometown and power base of formerpresident Rajapaksa. One of them, the Mattala International Airport, has been dubbed “theworld’s emptiest international airport.” A cricket �eld and real estate developments nearbylook little used, as well.
And then there’s the local port project in Hambantota. The �rst phase of MagampuraMahinda Rajapaksa Port—yes, it’s named after the former president—opened for business in2010. Costing over $1 billion, the port has proven to be a money-loser.
But here, too, the Sirisena administration, faced with maturing debt, had to agree to an“equity swap” with China. Last October China Merchants Port Holdings secured a 99-yearlease of the port with an 80% stake, along with 15,000 acres of land around it for a projectedindustrial zone for Chinese investors. In exchange China forgave most of the debt Sri Lankaacquired to develop the port in the �rst place. Beijing ended up with a strategically locatedoutpost on the Indian Ocean, a nice piece of the OBOR puzzle.
For Sirisena, the choice was to either make a huge default or essentially turn the port over toChina. Of course not everybody was happy with the deal—as evidenced by this month’s localprotests against Chinese “colonization.”
“The government is quite desperate,” said Anantha Perera, a researcher at ColumbiaUniversity’s Dart Center. “They came into power in 2015, and one of the hopes was that—based on their policies—they would be able to attract investment from other sources. Thathas not materialized, leaving Sri Lanka with a huge debt issue that was created by theprevious administration, but has come to maturity now.”
No other country has been quite so interested in investing in Sri Lanka as China. That’s astrue today as it was during Sri Lanka’s brutal 26-year civil war, which pitted the minority
Rajapaksa celebrates the opening of a port named a�ter himself, in 2010.
Tamil population in the northeast against the majority Sinhalese.
From 2005 to 2009, as the war was at its worst, China seemed to be the most reliable friendSri Lankan leaders had, even shielding them from condemnation at the UN Security Council.“China sold a lot of weapons and lent a lot of money to Sri Lanka and remained a useful allyeven in the Human Rights Council, all through the end of the war,” said Alan Keenan, a SriLanka project director at International Crisis Group.
But what seemed to be pure political logic at the time led to economic arrangements, too—mostly bene�cial to China. After the Rajapaksa regime put an end to the ethnic insurgencyin the north—killing an estimated 40,000 civilians in the process—it embarked on a foreign-funded construction spree. While risk-averse international investors kept Sri Lanka at arm’slength, China was ready and willing to help.
A considerable gap
Today, as Sri Lanka scrambles to service its debt and attract other foreign investors, China’sassistance looks less positive than it used to.
Last year Sri Lankan �nance minister Ravi Karunanayake complained that the interest rateson the loans from China were too high, resulting in a public spat with China’s ambassador,who defended the rates.
“There seems to be a considerable gap between the perception of how bene�cial Chineseinvestments abroad are, and the reality,” said Juan Pablo Cardenal, author of various bookson Chinese investments in the world. In many cases these investments come withenvironmental, labor, or social issues that “should make us revisit how bene�cial to thecountry they may truly be.”
“It will be interesting to see how other countries deal with China now that they know howChina plays these things,” said Balding, referring to both the high interest rates and Beijing’sincreasing assertiveness in Sri Lanka.
The Philippines, for instance, is eagerly accepting Chinese infrastructure investments,notably for Davao City, the home town and power base of mercurial president RodrigoDuterte, and Mindanao, the island it’s on.
Meanwhile, thousands of Chinese workers have been brought in to Sri Lanka to work onprojects like Colombo Port City. The exact number is contested, but in a country with highunemployment, their presence is a political hot potato.
Mr. Chen, a manual laborer from Chongqing in southwest China, has spent more than twoyears at the project. “We work long days,” he said, asking to be identi�ed by his last nameonly. “About 10 hours, sometimes more. In the evening we go back to the dorms, and startagain the day after.”
Chen, who’s never had a Lankan meal while on the project, doesn’t know how long CHEC willkeep him in the country. But he does know one thing: “This port will be controlled by Chinafor decades.”
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