Sri Lanka can cut losses and benefit from Chinese investment in Hambantota: Samarajiva
ECONOMYNEXT – Sri Lanka can reap benefits from Chinese investments in Hambantota which is now a dead weight costing millions in loan repayments and interest each year on top of operatonal losses, an economist and infrastructure specialist has said.
Rohan Samarajiva, head of LirneAsia, a regional policy think tank said Hambantota was built with debt for which Sri Lanka’s tax payers are now responsible, but its economic value is limited, except for the Chinese.
Samarajiva was not a supporter of Hambantota for a long time because Colombo was already the hub for the region he did not see the rationale for a second major port nearby.
Colombo attracts mainline ships that travel quickly on the East-West Asian route. Feeder vessels mainly from India connects to Colombo to put containers on mainline vessels.
The more mainline vessels that comes, makes transhipping times shorter and makes the hub more attractive. As business grows more ships call.
"Hubs have network characteristics, that build up over time," explains Samarajiva. "It is difficult for a new port to attract business and grow successfully."
At the moment Hambantota is being used for vehicle transhipment by India based car makers. Hambantota also failed to attract large industries for whatever reasons.
Though proponents of Hambantota harbour pointed to ships passing in close proximity of Sri Lanka southern coast saying they could be supplied with bunkers, in the real world things did not happen that way.
Samarajiva says ships will not usually simply call at a port to refuel. In addition to cargo, ports also needed ship chandling services and related facilities.
"That is why I initially criticized the plan to develop Hambantota port," he says. "Then things changed because of China’s strategic needs."
Most ships from China going West now have to pass through Malacca straits, a narrow sea lane about which the Chinese were uncomfortable.
Very large so-called ‘Malaccamax’ crude carriers can barely make it through the straits.
"The Chinese are not comfortable with this situation. Strategically it is a choke-point for them."
This led China to build a port in Kyaukpyu in Burma. It is linked by land to China with pipelines to carry oil and serves as a second gateway to the country from the Bay of Bengal, diversifying external connections, Samarajiva says.
"Suddenly the economics of Hambantota changed," he says.
For the Chinese, Hambantota was useful to serve Kyaukpyu and other planned ports on the eastern side of the Bay of Bengal.
Before post-independence economic nationalism by former British possessions in the region led to trade and other controls, strangling free trade, the Bay of Bengal was a very busy place, Samarajiva says.
The Rajapaksa regime chose to build Hambantota with loans paying interest. They did not fully understand the concept of getting equity investment and sharing risk due to a statist ideology.
"Now the loans have been taken. What many people do not understand is that it is a sunk cost, which is burden," Samarajiva says.
"Nobody, Japan or anyone else was interested enough to invest and make a business out of it."
Apart from getting 1.1 billion US dollars – which the government can use to repay Chinese or other loans – no further operating losses will burden the people. With a 20 percent stake, Sri Lanka Ports Authority could also earn profits in the future.
There have been statements made that after the port starts making profits, China will consider paying some fees, though there is no certainty over that.
Concerns have been raised that the period of the concession to the Chinese 99-years is too long.
Samarajiva’s says the government would have been in a better position if negotiations for a partnership had been worked out early.
"The nature of the investment is what justifies the length of a concession or lease," Samarajiva says.
"If you have large investments, say in power plants and associated infrastructure which take time to yield returns, the concession has to be long," he says.
"In the CICT terminal in the Colombo South Harbour, the investment is less complex, being directly connected to terminal operations. Therefore, a shorted term is justified.
"Should it be 50 years, 75 years or 99 years in Hambantota? One cannot give an answer without more information on the investments being planned and the business plans.
"One would need to know whether the PPP is responsible for the LNG terminal and pipelines that are to serve the proposed power plant and the infrastructure to support the proposed industrial parks.
"The main point is that there is no correct number. It is a negotiated number. The Chinese can afford to wait. The government cannot, because loan repayments have started."
The confusion is partly related to lack of information about the underlying deal. Sri Lanka originally had a framework deal to give a 60 percent stake in container terminals to China Merchants group and lease space for a dockyard to Cosco group.
The government also called bids for an international players to operate bunkering. The plans were suddenly dropped.
Samarajiva says a key point is that the government has not agreed to any conditions that limits its ability to develop Colombo and Galle ports.
"My understanding is that the Chinese request for a commitment not to develop potentially competitive ports within a distance that could include Galle has been refused. That is more important than worrying about the length of the lease." (Colombo/Dec29/2016 – Update II)