China’s Belt Road Initiative: Hambantota Port an example of China’s Debt Diplomacy?

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By Andre Wheeler

An alternative headline for this article could quite easily have been: “Does Sri Lanka really want Hambantota Port returned”.  This question is a response to the numerous recent headlines that claim that Sri Lanka’s newly elected government is demanding a return of the Port. These reports often claim that Hambantota has placed the country in a financially precarious position as well as its sovereign security.

Whilst these headlines play well to target audiences that pursue the demise of the BRI, they do not give a full and clear review of what is happening on the ground. They also tend to ignore the benefits that a developing country can achieve by adopting a “win – win” approach to China’s BRI. It is interesting to note that as the USA and others try to address the perceived increased influence of China in Eurasia, comes the regular misinformation around the commercial and political motivations of China. Contextually we see why the increased focus on the region has set up an interesting challenge.

So, what is really happening with Hambantota?

It does not appear that Sri Lanka is asking for the return of the Port. Whilst President Rajapaksa said that he will revisit the Hambantota lease agreement during his first interview, at a later meeting in Colombo he clarified his statement. He informed the foreign press that Sri Lanka is not looking to amend the commercial agreement but wants to revisit security at the Port.

Some context to Sri Lanka debt is needed to better understand why Hambantota is such a political football. Sri Lanka’s international debt obligations by the end of 2015, was such that $17billion was required to pay for maturing foreign loans between 2019 and 2023. With $55 billion in foreign debt and foreign reserves only totalling $8.3 million, Sri Lanka was headed for financial ruin. It is worthwhile noting that China accounted for only 10% of that debt. This raises some interesting questions as to the veracity of claims that only China uses the notion of “debt diplomacy”.

Another claim made is that China charges high commercial interest rates in order to secure indebtedness of Countries. However, when looking at a typical loan structure offered by China, they are offered on concessional terms, at a rate of 2% with a typical repayment period of 20 years as well as a grace period for repayment between 5 – 12 years. In the case of Hambantota, there were five loans paid to Sri Lanka between 2007 and 2014 to construct the Port. Whilst the total amounted to around $1.3billion, only $357 million were obtained at the higher commercial interest rate of 6%, the balance have been given at the concessionary rate of 2%.  Furthermore, the loan repayment instalments required by China’s EXIM Bank, only accounted for 5% of Sri Lanka’s TOTAL foreign debt repayments.

It should also be noted that there was no ‘debt for asset “swap. There has been no debt written off in exchange for equity. The Loans and Port Lease agreements are separate items, as such 70% of Hambantota has been leased for 99 years to China. The remaining 30% is held by the Sri Lanka Port Authority, with joint operations of the port. In other words, Sri Lanka still owns the port and the $1.12 billion paid in lease agreement was used, not to pay for construction of the port but used to cover Sri Lanka’s balance of payments issues.

It is safe to say that claims around China’s predatory “debt diplomacy” strategy, does not stand up to scrutiny. As is argued by the Chief Economist at the Eurasian Fund for Stabilization and Development, China uses its Triple A credit rating to allow developing countries with lower credit ratings, to access funds at lower rates of interest. This is particularly true of the Asia Infrastructure Investment Bank. Furthermore, it allows developing nations to build infrastructure itself to generate loan repayments.

There is also an ongoing claim that Hambantota was a poor choice in terms of location and commercial viability. Of interest is the claim that the shallow draft at the port entrance was a substantial limitation. Some context is needed to understand the issue. The idea of the port was first conceived in 1997. The issue of depth and access were raised as were other issues that needed to be addressed during the development phase. This is typical of all port developments. For example, Darwin port in northern Australia, had to deal with a depth of 6 meters due to rock and tidal movements, India’s Sittwe port in Myanmar’s north had to accommodate ongoing silting issues in its development plans. These issues do not necessarily mean that a location is unviable as a port.

Whilst those critical of the port acknowledge that these issues were raised at the inception of Hambantota as well as India’s reluctance to help fund the development, they still argue that the facility can only handle small vessels due to the rock at the port entrance. The rocky entrance did present problems but was addressed in the three phase development plan. China provided loan funds, and phase one construction commenced in 2008 to 2010 with dredging of the channel. Phase two of the development dealt with the rock in 2011 by blasting to create a water depth of 16 to 17 meters. This changed the profile of the port from being limited to small vessels to a capability of handling larger vessels. A deep-water port is defined as one that can handle a fully laden panama vessel. This size vessel requires a water depth of 30ft which is a little over 9 metres – Hambantota’s water depth is now more than capable of handling these vessels. The cost of $40 million to deepen the entrance is small in the context of the $1.3 billion total cost.

One also needs to consider reason as to why Hambantota is seen as a good location for a port. There is a logic, other than the oft touted military claims, behind the port. When selecting a port location, an important criteria is the geography, particularly with regards shipping routes. It is estimated that 36,000 ships pass within 6 nautical miles of Sri Lanka’s south coast. Hambantota is strategically located along this active Europe-Asia trade route. We see this corridor carry 23.1 million teu’s in 2017. Colombo, to the north, can only handle 7 million teu’s and acts mainly as a transhipment port that services India.

Unlike Colombo, Hambantota, is on the southern coast of Sri Lanka and is closer to this important trade route.

Whilst progress has been slow, there has been progress, nevertheless. Before the Chinese investment, only 175 cargo ships stopped in at Hambantota, by the end of 2018, this had grown to 300. This facilitated a 60% growth in the number of cars shipped to the Middle East, Africa and South America. This growth led to the agreement between the Port and Hyundai Glovis in April followed by Nippon Yusen in October 2019, to upgrade services at the port for car transhipment. With Sinopec committing to provide bunkering and ship refuelling services, there has been the sight of drill and petrol processing ships being brought into Sri Lanka for the first time.

Whilst there is a lack of back up infrastructure, once built, the port becomes an important connector along the maritime Silk Road. The development of infrastructure and support services is the focus of Phase Three of the plan, and this is touted as being complete by 2023. With the Port still owned by Sri Lanka, it may well tine time for countries to invest in Hambantota as it can present an interesting alternative to the 23.1million teu’s that passes only fifteen kilometres from it.

This article is published with kind permission of Andre Wheeler of Wheeler Management. He may be contacted at: andre@wheelermanagement.com.au

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com

 

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