Wednesday July 17, 2019

Chinese companies to invest in Sri Lanka only after new laws; no debt equity swaps

Apr 10, 2016 16:12 PM GMT+0530 | 3 Comment(s)

ECONOMYNEXT - Companies from China will invest in Sri Lanka after new laws are made, Prime Minister Ranil Wickremesinghe said as a joint statement after a state visit to China called for a favourable business and investment climate to be created.

No headway has been made on highly publicised claims about re-negotiating debt. Attempts to swap debt to equity have also failed, though Chinese firms have expressed willingness to take-over some operating business along with their debt.

Sri Lanka however is seeking more investments in the future.

"Chinese are interested, certainly, they are waiting for our laws," Wickremesinghe told reporters in Colombo Sunday.

Sri Lanka is making a 1,000 acre industrial zone for Chinese investors in Hambantota.

An oil refinery in Hambantota was a possibility, Prime Minister Wickremesinghe said.

A liquefied natural gas (LNG) power plant in Hambantota is also on the cards. However for state-run Ceylon Electricity Board to legally purchase power from an LNG plant, its Long Term Generation Plan has to be changed.

China's Cosco Shipyard has also done a feasibility in building a dockyard in Hambantota, but no investment has yet been made.

A Chinese consortium is expected to build a container terminal in Hambantota in second phase expansion.

Investment Protection

China however is seeking a better environment for its companies to work in Sri Lanka.

In a joint statement released in Beijing after the Prime Minister's visit Sri Lanka pledged to create a better environment for Chinese investors.

"Sri Lanka also welcomes further investment from Chinese enterprises and will continue its cooperation with Chinese companies by creating a favourable investment climate and business environment for Chinese enterprises," the statement said.

Wickremesinghe said a better environment will be given for all investors coming to Hambantota.

"For Chinese companies to come and invest, companies from other countries to come, we will give rights," Prime Minister said.

"We also informed how the investments will be protected, through new laws."

China Communications and Construction Company (CCCC) learned a hard lesson in investing in Sri Lanka without proper legal foundation when its 1.4 billion US dollar sea reclamation project known as the Port City was suspended by Wickremesinghe after he came to power in January 2015.

The firm is now claiming 125 million dollars in damages, though the go ahead to resume work has been given by Sri Lanka.

Financial Centre

Wickremesinghe side-stepped questions on whether the claim had been negotiated down, saying the administration would locate a planned Colombo International Financial Centre within Port City enhancing its value, and by rights the company should pay Sri Lanka.

Wickremesinghe is to bring a new legal framework to set up a Colombo International Financial Centre, but analysts say it may have limited success without reform to the country's balance-of-payments crisis-prone soft-pegged central bank.

Financial centres in the region have monetary arrangements with complementary monetary and exchange rate policies which are not prone to balance of payments trouble.

These include Hong Kong (true currency board), Singapore (modified currency board), Tokyo (floating rate) and Dubai (currency board-like with rates keeping pace with US). Labuan in Malaysia has not had to same success as the others.

The central bank generated currency crises in 2009, 2011 and is now negotiating with the International Monetary Fund for another bailout, following a credit downgrades which is expected to be finalized this month.

Repeated IMF bailouts and downgrades are hardly the stuff to inspire confidence in financial centres. The central bank is also entangled in corruption allegations.

Once Bitten

It is not clear when work will start at the Port City, though nature has done some of the work for the firm with a part of it already filled with sand due to sea action during the year that work was suspended.

The port city company started work on shaky legal ground without a long term concession agreement in place, using an interim deal with Sri Lanka's Ports Authority, which had no capacity to give anyone the right to reclaim sea.

No enabling legislation has yet been brought to give such capacity, and the old interim deal has been extended for six months on a cabinet decision.

Sri Lanka's new administration hopes to give capacity to a planned Megapolis agency to contract with the reclamation company.

A joint venture company is planned, instead of the current arrangement of a 100 percent Chinese owned company, reclaiming the land and giving part of the land to Sri Lanka.

Debt to Equity

Sri Lanka has also had an apparent set-back in an effort to swap equity for debt, a hazy scheme that some analysts say was doomed to failure from the start.

Analysts say China Development Bank, or Exim Bank of China which gave the loans are hardly likely to give up their interest earning loans and get shares, even if they had any capacity or it was even legal for the banks to manage the underlying assets.

What is more doable, analysts say is for some assets such as Mattala Airport to be spun off out of the Sri Lanka Airport and Aviation Services Limited and sold wholly or in part to a Chinese firm which would then operate it to generate the cashflows to service the loans.

In theory the same could be done to Hambantota port, thought the standard international model is to give concessions for container terminals to be operated by a private company, which will pay leases and fees to the main port company to recover the cost of building breakwater and other non-revenue infrastructure.

Movement of cargo from the industrial zone, or refinery would also generate revenue for the first phase of the port which will handle bulk cargo. China is already interested in a joint venture to build a container terminal in Hambantota.

Wickremesinghe also confirmed that debt to equity swap was not possible.

"In some areas, some companies said if you give it to us ((aperter bara denner), we will also take-over the loans," Wickremesinghe said.

"To do that based on China's laws and Sri Lanka's laws we will have to find a way. So we want to discuss ways of reducing the debt burden and work with these companies."

Loan Re-negotiation

Wickremesinghe said though loans were taken, the children of the present generation and their children would have to repay the loan.

There also does not seem to be any headway yet on much publicised claims that the new administration will re-negotiate eight billion dollars of 'high interest' loans taken from China.

"Once we take it up, we will discuss it," Prime Minister Wickremesinghe said.  "I think we can sort it out amicably."

Despite criticism analysts say the loan that gives the highest return to the country was the one taken to build a 900 MegaWatt coal plant.

At the moment it is generating about 30 percent of the energy in the power sector at around 4.00 rupees a unit, generating massive profits and more than enough cash flow to service loans as long as electricity is properly priced.



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  1. NAK April 15, 02:44 AM

    There were idiots,who said the same thing, back in the early seventies when Katunayake airport was being built.If any of these projects are not financially viable as some pundits claim,how can the private sector make them viable?It only shows the inability of this government to get things done.

  2. Leel April 13, 09:39 AM

    Mattala airport is useless project never generate revenue, port city will not start unless government pay 125 m they ask and Chinese will not invest in Sri Lanka with this government.

  3. KT April 11, 03:17 AM

    Waiting for others to help (including the Chinese and the IMF) is not going to solve Sri Lanka's financial problems. You need to take the initiative to your own hands by doing some aggressive privatizing or listing of government entities

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