Unable to repay its debt, Sri Lanka gave China a controlling equity stake in addition to a 99-year lease for Hambantota port, which it handed over inwards Dec 2017. The economical rationale for Hambantota is weak, given existing capacity in addition to expansion plans at Colombo port, fueling concerns that it could give-up the ghost a Chinese naval facility. Recipient countries should link infrastructure projects to broader evolution strategies that assess projects inside larger networks in addition to monitor overall debt levels. The international community should expand alternatives to Chinese infrastructure financing but cannot in addition to should non back upwards all proposed projects. The thought from Hambantota’s Martello Tower says it all. Built past times the British inwards the early on 1800s equally a sentry post, the pocket-sized circular fort occupies a loma on Sri Lanka’s southern coast. Look west, along that coastline, in addition to shipping cranes rising higher upwards a novel port. Look south, out to the Indian Ocean, in addition to hulking ships movement cargo along ane of the world’s busiest shipping lanes. These images could converge inwards the coming years, but on most days, they stay miles apart. Last year, exclusively 175 cargo ships arrived at Hambantota’s port.
This gap explains how Hambantota became a cautionary tale inwards Asia’s infrastructure contest. The port was intended to transform a pocket-sized line-fishing town into a major shipping hub. In pursuit of that dream, Sri Lanka relied on Chinese financing. But Sri Lanka could non repay those loans, in addition to inwards 2017, it agreed to give China a controlling equity stake inwards the port in addition to a 99-year lease for operating it. On the solar daytime of the handover, China’s official intelligence way tweeted triumphantly, “Another milestone along path of #BeltandRoad.”
The challenge, of course, is that political incentives are skewed toward starting large projects sooner without mitigating risks.
Not everyone is celebrating. Negotiations around the port sparked local protests in addition to accusations that Sri Lanka was selling its sovereignty. Some observers worry that China’s infrastructure investments are creating economical dependencies, which are hence exploited for strategic purposes. In 2014, a Chinese submarine docked at Colombo, Sri Lanka’s capital, setting off alarms almost China’s expanding armed forces footprint. Unlike Colombo, where Sri Lanka’s navy is headquartered, Hambantota is to a greater extent than isolated in addition to could offering Chinese vessels greater independence.
Sri Lankan officials cause got tried to calm those fears. “Sri Lanka headed past times President Maithripala Sirisena does non movement into into armed forces alliances with whatever solid reason or brand our bases available to unusual countries,” Sri Lankan Prime Minister Ranil Wickremesinghe said inwards August 2017. In Feb 2018, Sri Lanka’s highest-ranking armed forces officeholder said, “There had been this widespread claim almost the port beingness earmarked to live used equally a armed forces base. . . . No action, whatsoever volition live taken inwards our harbor or inwards our waters that jeopardizes India’s safety concerns.” Sri Lanka’s parliament approved the agreement, but the text has non been made public, allowing suspicions to fester.
Political Ambitions, Economic Realities
As speculation continues almost Hambantota’s future, its past times provides lessons for Asia’s broader infrastructure competition. For recipient countries, the instance underscores the importance of assessing infrastructure projects equally component subdivision of an overall evolution strategy. Infrastructure projects oft hold back to a greater extent than attractive inwards isolation, but their long-term success hinges on beingness component subdivision of a wider network, whether transportation, energy, information, or other systems. Influenza A virus subtype H5N1 broader approach also draws attending to debt sustainability. The challenge, of course, is that political incentives are skewed toward starting large projects sooner without mitigating risks.
Hambantota’s port did non appear overnight, but resulted from a serial of Sri Lankan regime decisions. Many Chinese-funded projects inwards Sri Lanka cause got been unsolicited, but Hambantota’s port is non ane of them. Constructing a port at Hambantota has been component subdivision of Sri Lanka’s official evolution plans since at to the lowest degree 2002. In 2003, SNC Lavalin, a French applied scientific discipline firm, completed a feasibility report for the port. Influenza A virus subtype H5N1 Sri Lankan government-appointed chore forcefulness reviewed in addition to ultimately rejected the study, faulting it for ignoring the port’s potential touching on on Colombo Port, which inwards recent years has handled roughly 95 per centum of Sri Lanka’s international trade.
Hambantota’s primary challenge came from inside Sri Lanka itself.
In 2006, Ramboll, a Danish consulting firm, completed a minute feasibility study. It took a relatively optimistic thought of the port’s potential, basing traffic projections on Sri Lanka’s futurity increment in addition to overflow from existing ports at Colombo, Galle, in addition to Trincomalee. Dry in addition to interruption mass cargo (commodities in addition to goods loaded individually rather than inwards criterion containers) would render the primary root of traffic until 2030, when the residue would start out shifting toward container traffic. By 2040, the port would grip nearly 20 1000000 twenty-foot equivalent units (TEU), roughly equally much equally the world’s 5th busiest port in2015.
With that assessment inwards hand, Sri Lankan President Mahina Rajapaksa was fifty-fifty to a greater extent than eager to pursue the project. Elected inwards 2005, Rajapaksa had promised to develop Sri Lanka’s southern districts, peculiarly his abode district of Hambantota, which was alongside the areas devastated past times the 2004 tsunami. During Rajapaksa’s tenure inwards office, Sri Lanka embarked on a serial of ambitious projects. Many of these big-ticket projects—including an international airport, a cricket stadium, in addition to the port—had iii things inwards common: they used Chinese financing, Chinese contractors, in addition to Rajapaksa’s name.
Mattala Rajapaksa International Airport, “world’s emptiest airport.” - Photo: Jonathan Hillman/CSIS Chinese loans were oft at high rates. The kickoff stage of the Hambantota port projection was a $307 1000000 loan at 6.3 per centum interest. Multilateral evolution banks typically offering loans at rates closer to 2 or 3 percent, in addition to sometimes fifty-fifty closer to zero. One argue China is successful inwards locking inwards these higher rates is that meliorate alternatives are oft unavailable. Another argue is that Chinese loans, patch oft requiring the partner to exercise Chinese contracts, are non equally stringent inwards their requirements for safeguards in addition to reforms. There were no competing offers for Hambantota’s port, suggesting that other potential lenders did non run into rewards commensurate with the project’s risks.
Putting political ambitions ahead of marketplace demands, this approach failed to consider Hambantota port inside a larger evolution strategy. Critically, the port at Colombo handled 5.7 1000000 TEU inwards 2016, has non reached capacity, in addition to volition expand inwards the coming years. If Colombo port’s most ambitious plans are realized, its capacity could expand to 35 1000000 TEU past times 2040. Early plans for Hambantota focused on offering fuel services, but nether Rajapaksa, it was scaled upwards to include other activities, many of them already carried out at Colombo. In sum, Hambantota’s primary challenge came from inside Sri Lanka itself.
The political environs changed inwards 2015, when Maithripala Sirisena unseated Rajapaksa, but the novel government’s options were limited. It reexamined some deals in addition to halted construction at Hambantota’s port. While well-intentioned, this also delayed whatever revenue the port could generate, effectively making it fifty-fifty to a greater extent than hard to service the loans. By 2015, some 95 per centum of Sri Lanka’s regime revenue was going toward servicing its debt, in addition to the regime initiated debt renegotiations with China. Talks culminated inwards the seventy per centum equity in addition to 99-year lease deal.
The Path Forward
Highlighting the mistakes that led to Hambantota’s handover is easier than identifying a path forward. But Sri Lanka in addition to its partners are non without options for limiting the harm in addition to preventing similar outcomes inwards the future.
For its part, the Sri Lankan regime could pose out the total text of the port understanding to assist address concerns almost the port’s futurity use. It could also improve regime procurement in addition to accounting processes. National debt remains a major concern. In Feb 2018, Sri Lanka’s auditor full general admitted that he could non say with certainty how much world debt the solid reason owed. Greater transparency would assist across the board, from evaluating projection proposals to contracting in addition to payments.
Advancing a “free in addition to open” Indo-Pacific volition non come upwards free.
The challenge for Sri Lanka’s partners is to avoid throwing proficient coin after bad. India, for example, has expressed involvement inwards taking over the international aerodrome close Hambantota port. Officials cause got suggested it could live used equally a flying school. The prospect of turning a failing projection around is hard to resist. But if that endeavour is unsuccessful, Bharat risks assuming the reputational harm that China would otherwise suffer. Likewise, Indian in addition to Japanese involvement inwards port facilities inwards Trincomalee, on Sri Lanka’s eastward coast, should live tempered past times Sri Lanka’s debt levels in addition to the existence of competing ports inwards the region.
Trincomalee, Sri Lanka - Photo: Jonathan Hillman/CSIS India has some other type of leverage, but may non live willing to exercise it. Its domestic shipping laws practice non allow unusual vessels to comport domestic cargo betwixt Indian ports. If those laws were loosened, allowing for greater international participation, India’s ain ports would give-up the ghost to a greater extent than active in addition to the postulate for transshipment services at Sri Lanka’s ports would decline. That would probable cutting into a primary root of Hambantota’s futurity traffic, but also negatively touching on Colombo port. Perhaps the biggest barrier to implementation are the interests inside Bharat that practice goodness from these laws in addition to the condition quo. But at some point, a stronger reply to murky Chinese port investments could include greater openness of India’s ain ports.
Clearly, advancing a “free in addition to open” Indo-Pacific volition non come upwards free. As Sri Lanka’s sense illustrates, it is non plenty to warn against embarking on risky projects. When leaders weigh the short-term incentives of starting projects against the long-term risks of debt in addition to subpar performance, the one-time oft wins out. Better financing alternatives could bound recipient countries’ exposure to high involvement rates in addition to projection price that practice unsafe dependencies. Capacity-building measures could assist prepare governments to evaluate projects in addition to negotiate terms.
But none of this volition solve the telephone substitution challenge of walking away from unviable projects. Better financing alternatives cannot in addition to should non live made available for all proposed projects. Some projects exactly should non live pursued. That responsibleness falls to regime officials, in addition to inwards democracies, the citizens who elect them. Sri Lanka’s recent local elections suggest its political winds could alter withal again, potentially bringing one-time President Rajapaksa dorsum to mightiness inwards 2020. When y'all climb downward from Hambantota’s Martello Tower, in that location is a plaque in addition to moving painting of him, smiling, at the bottom of the ladder.
Jonathan Hillman is a boyfriend with the Simon Chair inwards Political Economy in addition to managing director of the Reconnecting Asia Project at CSIS.
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