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| Hambantota port. Reuters |
By Admiral Prof. Jayanath Colombage and Prof. Huang Yunsong
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| Jayanath Colombage |
Infrastructure development projects in Sri Lanka, financed with Chinese loans, have become a source of hot debate. It was again cited by United States Vice President Mike Pence as debt-trap diplomacy in his latest accusation against China.
Some arguments, probably based on selective information and wild extrapolations from individual cases, have their own logic as part of a grand strategy against China. However, it doesn't hurt to have a look at the other side of the story, which relies more on empirical factors and factual arguments.
When the separatist conflict for nearly three decades ended in 2009, Sri Lanka felt desperately hungry for economic development. To Sri Lanka's dismay, neither Western democracies nor the immediate neighbor offered to play a major role in its reconstruction or investment in infrastructure, except for several credit lines for housing, hospitals and railways provided by India. Due to the consistent support for Sri Lanka during and after the conflict, China soon became the main development partner and the biggest foreign direct investor.
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| Huang Yunsong |
As the epicenter of the Indian Ocean, Sri Lanka sits right next to one of the busiest shipping lanes in the world. Major maritime powers cannot tolerate China's ambition to take advantage of its strategically important location, not even for economic purposes. This is the main reason for Sri Lanka being singled out to highlight the so-called debt-trap diplomacy of China.
Over the years, Sri Lanka has aspired to be a maritime hub of the Indian Ocean. This concept was developed even before the "Belt and Road Initiative" of China. In 2008, the Sri Lankan government launched the Hambantota port project, based on feasibility studies by several international engineering consultancy firms, such as Ramboll Group A/S of Denmark and SNC Lavalin Inc. of Canada. Before engaging the Chinese company, the project was offered to India. However, India declined the offer due to multiple reasons.
For a three-phase project, there is a considerable gap between completion of the port and starting full commercial operations. The third phase, costing $400-$600 million is due to start at the end of 2018. As such, it was not intended to derive commercial returns soon after the start of operations.
One of the objectives of the port was to provide ancillary services and bunkering operations, which began in 2011. Considering the Indian Ocean does not have a main bunkering hub, prospects for Hambantota to attract shipping for bunkering should be good, if it could be made competitive and provide a reliable service. However, bunkering operations were stopped in 2015 due to a policy decision, confirming the fact that a stable and favorable political environment is essential for attracting foreign direct investment based on national interests, rather than subjecting such national projects to the vagaries of party politics.
Sri Lanka is in a serious economic predicament due to debt servicing difficulties, which exceed the country's capacity for generating revenue. However, it may be pointed out that Sri Lanka's foreign debt stood at $51.8 billion by December 2017, and China's share was in the region of $8 billion. It is questionable for certain powers to focus attention only on China's loans while neglecting the full picture.
It was alleged that China provided a loan to the Hambantota port project at an excessive interest rate around 6 percent, knowing that there would be insufficient business at the port to repay the debt, with the intention of swapping the debt for equity. On the contrary, according to former President Rajapaksa, $1 billion had been taken at a concessionary rate of 2 percent, and a tranche of $307 million was taken at the London interbank offered rate (LIBOR) plus 0.75 percent, pushing up the interest rate to 6.3 percent. If these figures are accurate, it becomes apparent that the major part of China's loan was taken at a concessionary rate.
China Merchant Port Holdings now owns a 70 percent stake in the Hambantota port for 99 years, with the remaining shares in the hands of Sri Lanka. But it is noteworthy that the lease agreement provides for purchase of shares held by China, if Sri Lanka so decides at a future date.
China's interest in Sri Lanka should be understood in the context of the strong bilateral relations that go far back in history. It is then unsurprising for Sri Lanka to extend support for China's "Belt and Road Initiative."
Rather than debt-trap diplomacy, the true topic here is really about the greatest change at regional and global levels for the past several centuries. When the U.S. works hard to block China's ascendance, Sri Lanka does not want to be dragged into their conflict. Fully aware of the nature of China-India relations, Sri Lanka would never opt to compromise India's security interests by siding with China.
Jayanath Colombage, PhD, is a former chief of the Sri Lankan Navy who retired as a four-star admiral after active service of 37 years. He holds a PhD from the General Sir John Kotelawala Defense University (Sri Lanka). He was the former chairman of the Sri Lanka Shipping Corporation and an adviser to the President of Sri Lanka on maritime affairs. Huang Yunsong is a professor of law, coordinator of the China Center for South Asian Studies and associate dean at the School of International Studies, Sichuan University. He received his PhD in law from Sichuan University.
