Politics, greed and the tilting of influence across South Asia
HAMBANTOTA, SRI LANKA— Every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes.
Yes, though feasibility studies said the port wouldn’t work. Yes, though other frequent lenders like India had refused. Yes, though Sri Lanka’s debt was ballooning rapidly under Rajapaksa.
Over years of construction and renegotiation with China Harbor Engineering Co., one of Beijing’s largest state-owned enterprises, the Hambantota Port Development Project distinguished itself mostly by failing, as predicted. With tens of thousands of ships passing by along one of the world’s busiest shipping lanes, the port drew only 34 ships in 2012. And then the port became China’s. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December.
The transfer gave China control of territory just a few hundred miles off the shores of a rival, India, and a strategic foothold along a critical commercial and military waterway.
The case is one of the most vivid examples of China’s ambitious use of loans and aid to gain influence around the world — and of its willingness to play hardball to collect.
The debt deal also intensified some of the harshest accusations about President Xi Jinping’s signature Belt and Road Initiative: that the global investment and lending program amounts to a debt trap for vulnerable countries around the world, fuelling corruption and autocratic behaviour in struggling democracies.
Months of interviews with Sri Lankan, Indian, Chinese and Western officials, and analysis of documents and agreements stemming from the port project, present a stark illustration of how China and the companies under its control ensured their interests in a small country hungry for financing.
During the 2015 Sri Lankan elections, large payments from the Chinese port construction fund flowed directly to campaign aides and activities for Rajapaksa, who had agreed to Chinese terms at every turn and was seen as an important ally in China’s efforts to tilt influence away from India in South Asia. The payments were confirmed by documents and cash checks detailed in a government investigation seen by the New York Times.
Though Chinese officials and analysts have insisted that China’s interest in the Hambantota port is purely commercial, Sri Lankan officials said that from the start, the intelligence and strategic possibilities of the port’s location were part of the negotiations.
Initially moderate terms for lending on the port project became more onerous as Sri Lankan officials asked to renegotiate the timeline and add more financing. And as Sri Lankan officials became desperate to get the debt off their books in recent years, the Chinese demands centred on handing over equity in the port rather than allowing any easing of terms.
Though the deal erased roughly $1 billion (U.S.) in debt for the port project, Sri Lanka is now in more debt to China than ever, as other loans have continued and rates remain much higher than from other international lenders.
Rajapaksa and his aides did not respond to multiple requests for comment, made over several months, for this article. Officials for China Harbor also would not comment.
Estimates by the Sri Lankan Finance Ministry paint a bleak picture: This year, the government is expected to generate $14.8 billion of revenue, but its scheduled debt repayments, to an array of lenders around the world, come to $12.3 billion.
“John Adams said infamously that a way to subjugate a country is through either the sword or debt. China has chosen the latter,” said Brahma Chellaney, an analyst who often advises the Indian government and is affiliated with Center for Policy Research, a think tank in New Delhi.
Indian officials, in particular, fear that Sri Lanka is struggling so much that the Chinese government may be able to dangle debt relief in exchange for its military’s use of assets such as the Hambantota port — though the final lease agreement forbids military activity there without Sri Lanka’s invitation.
“The only way to justify the investment in Hambantota is from a national security standpoint — that they will bring the People’s Liberation Army in,” said Shivshankar Menon, who served as India’s foreign secretary and then its national security adviser as the Hambantota port was being built. An engaged ally The relationship between China and Sri Lanka had long been amenable, with Sri Lanka an early recognizer of Mao’s communist government after the Chinese Revolution. But it was during a more recent conflict — Sri Lanka’s brutal 26year civil war with ethnic Tamil separatists — that China became indispensable.
From the start, officials questioned the wisdom of a second major port, in a country a quarter the size of Britain and with a population of 22 million, when the main port in the capital was thriving and had room to expand. Feasibility studies commissioned by the government had starkly concluded that a port at Hambantota was not economically viable.
“They approached us for the port at the beginning, and Indian companies said no,” said Menon, the former Indian foreign secretary. “It was an economic dud then, and it’s an economic dud now.”
But Rajapaksa green-lighted the project, then boasted in a news release that he had defied all caution — and that China was on board.
The Sri Lanka Ports Authority began devising what officials believed was a careful, economically sound plan in 2007, according to an official involved in the project. It called for a limited opening for business in 2010, and for revenue to be coming in before any major expansion.
The first major loan it took on the project came from the Chinese government’s Export-Import Bank, or Exim, for $307 million. But to obtain the loan, Sri Lanka was required to accept Beijing’s preferred company, China Harbor, as the port’s builder, according to a U.S. Embassy cable from the time, leaked to WikiLeaks.
That is a typical demand of China for its projects around the world, rather than allowing an open bidding process. Across the region, Beijing’s government is lending out billions of dollars, being repaid at a premium to hire Chinese companies and thousands of Chinese workers, according to officials across the region. There were other strings attached to the loan, as well, in a sign that China saw strategic value in the Hambantota port from the beginning.
Nihal Rodrigo, a former Sri Lankan foreign secretary and ambassador to China, said that discussions with Chinese officials at the time made it clear that intelligence sharing was an integral, if not public, part of the deal. In an interview with The Times, Rodrigo characterized the Chinese line as, “We expect you to let us know who is coming and stopping here.”
In later years, Chinese officials and the China Harbor company went to great lengths to keep relations strong with Rajapaksa, who for years had faithfully acquiesced to such terms.
In the final months of Sri Lanka’s 2015 election, China’s ambassador broke with diplomatic norms and lobbied voters, even caddies at Colombo’s premier golf course, to support Rajapaksa over the opposition, which was threatening to tear up economic agreements with the Chinese government.
As the January election inched closer, large payments started to flow toward the president’s circle.
Most of the payments were from a subaccount controlled by China Harbor, named “HPDP Phase 2,” shorthand for Hambantota Port Development Project.
China’s network
After nearly five years of helter-skelter expansion for China’s Belt and Road Initiative across the globe, Chinese officials are quietly trying to take stock of how many deals have been done and what the country’s financial exposure might be.
There is no comprehensive picture of that yet, said one Chinese economic policy-maker, who like many other officials would speak about Chinese policy only on the condition of anonymity.
Some Chinese officials have become concerned that the nearly institutional graft surrounding such projects represents a liability for China, and raises the bar needed for profitability. Xi acknowledged the worry in a speech last year, saying, “We will also strengthen international co-operation on anti-corruption in order to build the Belt and Road Initiative with integrity.”
In Sri Lanka’s case, port officials and Chinese analysts have also not given up the view that the Hambantota port could become profitable, or at least strengthen China’s trade capacity in the region.
Ray Ren, China Merchant Port’s representative in Sri Lanka and the head of Hambantota port’s operations, insisted that “the location of Sri Lanka is ideal for international trade.” And he dismissed the negative feasibility studies, saying they were done many years ago when Hambantota was “a small fishing hamlet.”
Hu Shisheng, the director of South Asia studies at the China Institutes of Contemporary International Relations, said that China clearly recognized the strategic value of the Hambantota port.
But he added: “Once China wants to exert its geostrategic value, the strategic value of the port will be gone. Big countries cannot fight in Sri Lanka — it would be wiped out.”
Although the Hambantota port first opened in a limited way in 2010, before the Belt and Road Initiative was announced, the Chinese government quickly folded the project into the global program.
Shortly after the handover ceremony in Hambantota, China’s state news agency released a boastful video on Twitter, proclaiming the deal “another milestone along the path of #BeltandRoad.”
Aport to nowhere
By 2012, the port was struggling to attract ships — which preferred to berth nearby at the Colombo port — and construction costs were rising as the port began expanding ahead of schedule. The government decreed later that year that ships carrying car imports bound for Colombo port would instead off-load their cargo at Hambantota to kick-start business there. Still, only 34 ships berthed at Hambantota in 2012, compared with 3,667 ships at the Colombo port, according to a Finance Ministry annual report.
“When I came to the government, I called the minister of national planning and asked for the justification of Hambantota Port,” Harsha de Silva, the state minister for national policies and economic affairs, said in an interview. “She said, ‘We were asked to do it, so we did it.’ ”
Determined to keep expanding the port, Rajapaksa went back to the Chinese government in 2012, asking for $757 million.
The Chinese agreed again. But this time, the terms were much steeper.
The first loan, at $307 million, had originally come at a variable rate that usually settled above 1 or 2 per cent after the global financial crash in 2008. (For comparison, rates on similar Japanese loans for infrastructure projects run below half a per cent.)
But to secure fresh funding, that initial loan was renegotiated to a much higher 6.3 per cent fixed rate. Rajapaksa acquiesced.
The rising debt and project costs, even as the port was struggling, handed Sri Lanka’s political opposition a powerful issue, and it campaigned heavily on suspicions about China. Rajapaksa lost the election.
The incoming government, led by President Maithripala Sirisena, came to office with a mandate to scrutinize Sri Lanka’s financial deals.
It also faced a daunting amount of debt: Under Rajapaksa, the country’s debt had increased threefold, to $44.8 billion when he left office. And for 2015 alone, a $4.68-billion payment was due at year’s end.
Signing it away
The new government was eager to reorient Sri Lanka toward India, Japan and the West. But officials soon realized that no other country could fill the financial or economic space that China held in Sri Lanka. The Central Bank estimated that Sri Lanka owed China about $3 billion last year.
But Nishan de Mel, an economist at Verité Research, said some of the debts were off government books and instead registered as part of individual projects. He estimated that debt owed to China could be as much as $5 billion and was growing every year. In May, Sri Lanka took a new $1-billion loan from China Development Bank to help make its upcoming debt payment.
Government officials began meeting in 2016 with their Chinese counterparts to strike a deal, hoping to get the port off its balance sheet and avoid outright default. But the Chinese demanded that a Chinese company take a dominant equity share in the port in return, Sri Lankan officials say — writing down the debt was not an option China would accept.
When Sri Lanka was given a choice, it was over which state-owned company would take control: either China Harbor or China Merchants Port, according to the final agreement, a copy of which was obtained by The Times, although it was never released publicly in full.
China Merchants got the contract, and it immediately pressed for more: Company officials demanded 15,000 acres of land around the port to build an industrial zone, according to two officials with knowledge of the negotiations.
The Chinese company argued that the port itself was not worth the $1.1billion it would pay for its equity — money that would close out Sri Lanka’s debt on the port. Some government officials bitterly opposed the terms, but there was no leeway, according to officials involved in the negotiations. The new agreement was signed in July 2017, and took effect in December.
The deal left some appearance of Sri Lankan ownership: Among other things, it created a joint company to manage the port’s operations and collect revenue, with 85 per cent owned by China Merchants Port and the remaining15 per cent controlled by Sri Lanka’s government.
But lawyers specializing in port acquisitions said Sri Lanka’s small stake meant little, given the leverage that China Merchants Port retained over board personnel and operating decisions. And the government holds no sovereignty over the port’s land. Strategic concerns China had a stake in Sri Lanka’s main port as well: China Harbor was building a new terminal there, known at the time as Colombo Port City. Along with that deal came roughly 50 acres, solely held by the Chinese company, where Sri Lanka had no sovereignty.
That was dramatically demonstrated toward the end of Rajapaksa’s term, in 2014. Chinese submarines docked at the harbour the same day that Prime Minister Shinzo Abe of Japan was visiting Colombo, in what was seen across the region as a menacing signal from Beijing. When the new Sri Lankan government came to office, it sought assurances that the port would never again welcome Chinese submarines — of particular concern because they are difficult to detect and often used for intelligence gathering. But Sri Lankan officials had little real control.
Now, the handover of Hambantota to the Chinese has kept alive concerns about possible military use — particularly as China has continued to militarize island holdings around the South China Sea despite earlier pledges not to.
Sri Lankan officials are quick to point out that the agreement explicitly rules out China’s military use of the site. But others also note that Sri Lanka’s government, still heavily indebted to China, could be pressured to allow it.
And, as de Silva put it, “Governments can change.”
“They approached us for the port at the beginning … It was an economic dud then, and it’s an economic dud now.” SHIVSHANKAR MENON FORMER INDIAN FOREIGN SECRETARY