Infrastructure Past, Present, and Future Casebook/Hambantota Port, Sri Lanka

Introduction

This casebook is a case study on the Hambantota International Port by Anthony Reyes and Peter DerHagopian as part of the Infrastructure Past, Present and Future: GOVT 490/CEIE 499 Fall 2024 course at George Mason University's Schar School of Policy and Government and the Volgenau School of Engineering, and Sid and Reva Dewberry Department of Civil, Environmental, and Infrastructure Engineering. Under the instruction of Professor Jonathan Gifford.

Hambantota Port in Sri Lanka

Summary

Hambantota International Port, also known as Magampura Mahinda Rajapaksa Port, is a deep water port located in Hambantota, Sri Lanka, in the country’s Southern Province along the southern coast of the island. Hambantota is the country’s second largest port, after the Port of Colombo in the capital city. Construction for the port started in 2008, after the newly-elected President Mahinda Rajapaksa revitalized plans for the project by securing a loan of $306.7 million from China’s Export-Import (Exim) Bank and specified the China Harbour Engineering Company as the construction contractor. The first phase, out of three, of construction was finished in 2010, after the end of the Sri Lankan Civil War. Features of the first phase included a bunker terminal with the capacity of 500,000 tonnes of cargo, refueling stations for ships and aircraft, and ship repair/ship building facilities. The second phase of construction began in 2012, after the Sri Lankan Government gained an additional $757 million loan from China’s Exim Bank that allowed China Harbour Engineering Company and China’s Merchants Port to jointly operate the port for 35 years. As of present day, the second phase of construction is still unfinished and in 2016, President Maithripala Sirisena entered an agreement with China to sell 80% of shares, worth $1.12 billion, and a 99-year lease to China to take over ownership of the port to counter Sri Lanka’s $8 billion debt to China. Since this new deal, China’s Merchants Port have secured 15,000 acres of land surrounding the port to construct industrial zones, and the Chinese Navy has been using the port as a naval base for their submarines and to exert control over key maritime trade routes between the Strait of Malacca and the Suez Canal that sit just a few nautical miles from Hambantota.

The construction of the international port in Hambantota, and subsequent Chinese involvement, have been strife with controversy and reports of corruption. While the feasibility reports from both Canadian engineering firm SNC-Lavalin and Danish consulting firm Ramboll confirmed the economic benefits of the port, Former President Rajapaksa ignored their guidance and attempted to fast track construction without much profit. After its first year of opening, only 34 ships berthed at Hambantota, as opposed to 3,667 at the Port of Colombo. Concerns over Chinese involvement have also arisen out of the construction of this port, with Sri Lankan officials denouncing China’s exorbitant costs and extremely high interest rates. Many call Hambantota International Port a prime example of Chinese “debt-trap diplomacy” and accuse China of extending debt over Sri Lanka to gain political leverage to establish naval bases in the geopolitically strategic region. Additionally, Former President Rajapaksa has been accused of corruption, citing that he used funds for the construction of this project to provide kickbacks for himself and campaign officials.

Map of Location

Actors

Sri Lankan Government Actors
1. Ranil Wickremesinghe - Prime Minister of Sri Lanka from 1993-1994, 2001-2004, 2015-2018, 2018-2019 and in 2022. President of Sri Lanka from 2022-2024.
2. Mahinda Rajapaksa - President of Sri Lanka from 2005-2015. Prime Minister of Sri Lanka from 2004-2005, 2018 and 2019-2022. Minister of Finance from 2005-2015 and 2019-2021. President Rajapaksa is also from Hambantota.
3. Gotabaya Rajapaksa - President of Sri Lanka from 2019-2022, and also Former President Mahinda Rajapaksa’s brother.
4. Maithripala Sirisena - President of Sri Lanka from 2015-2019.
  1. Ravi Karunanayake - Minister of Finance from 2015-2017.
5. Sri Lanka Ports Authority (SLPA) - State-owned operator of major commercial ports in Sri Lanka.
Chinese Actors
1. China Merchants Group - State-owned enterprise that operates under the Chinese Ministry of Transport. Currently has 85% stake in the Port and has invested $1.12 billion into the port.
  1. China Merchants Port Holdings Company Limited (CMPHCL) - Subsidiary of China Merchants Group that oversees port operations, general and bulk cargo transportation, container and shipping business, air cargo, and logistics park operations.
  2. Colombo International Container Terminal Limited - Joint venture company between CMPHCL and SLPA that handles cargo in Sri Lanka’s capital city, Colombo.
  3. Hambantota International Port Group - Joint venture company between CMPHCL and SLPA that oversees operations of the port.
2. China National Petroleum Corporation - State-owned oil and gas corporation that was one of the first contractors of the port, overseeing refueling facilities and oil tank projects.
  1. Huanqiu Contracting and Engineering Corporation - Subsidiary of the China National Petroleum Corporation that handles the construction of oil refineries and oil tanks.
3. China Petroleum and Chemical Corporation (Sinopec) - State-owned and world’s largest oil refining company that operates the port’s bunkering facilities. Recently constructed an oil-refinery at the port.
4. Export-Import (Exim) Bank of China - Policy bank of China under the State Council that was the main financier of the port project.
  1. Li Ruogu - President of the Exim Bank from 2005-2015.
  2. China Development Bank - Subsidiary of the Exim Bank that raises funds for infrastructure projects.
5. China Communications Construction Company (CCCC) - State-owned engineering and construction company that designs, constructs and operates infrastructure assets such as highways, bridges, tunnels, railways, airports and ports.
  1. China Harbour Engineering Company - Subsidiary of CCCC that is the main contractor for construction of the port.
6. People’s Liberation Army Navy - The Navy of the People’s Republic of China that has been using Hambantota Port to dock their military vessels and submarines.
Additional Actors:
1. Shivshanker Menon - Foreign Secretary of India from 2006-2009. Notably rejected Sri Lanka’s request to finance Hambantota Port.
2. AtkinsRéalis Group Inc. (SNC-Lavalin) - Canadian engineering consulting firm that was the original contractor for construction of the Hambantota Port and first company to conduct a feasibility report on the prospects of building the port.
3. Rambøll Group (Ramboll) - Danish engineering consulting firm that was hired by Former President Rajapaksa to conduct a second feasibility report on the prospects of building Hambantota International Port.

Timeline

December 5th, 2001 - Parliamentary elections are held in Sri Lanka. Ranil Wickremesinghe is elected Prime Minister and he and the United National Front pledge to build another seaport to ease traffic on the Port of Colombo.
June 2002 - The Sri Lankan Government invited both the Canadian International Development Agency and the Port Autonome of Marseille to conduct feasibility reports on constructing a new port. SNC-Lavalin of Canada submits a feasibility report, but both France and Canada ultimately decide to not follow through with any investment due to the tense political climate of Sri Lanka.
2005 - Newly-elected President Mahinda Rajapaksa hires Danish consulting firm Ramboll to conduct an additional feasibility report for building a port in Hambantota, the president’s hometown. From this, the project is broken down into three phases. After both India and the United States rejected Sri Lanka’s requests for financing, China was approached and accepted the offer. Huanqiu Contracting & Engineering became the first construction contractor after a deal was signed between the two parties.
July 2006 - Sri Lankan officials meet with Li Ruogu at the Exim Bank where Chinese officials encourage the usage of concessional loans to finance the project.
February 2007 - President Rajapaksa visits China to finalize loan deals for the port. Exim Bank agrees to fund 85% of the project, or $307 million with SLPA covering the other 15%, or $53 million.
January 2008 - Sri Lanka hires China Harbour Engineering Company to construct the first phase of the port, and construction begins.
November 18th, 2010 - After rushed construction, the first phase is completed and the port is limitedly opened on the President’s Birthday.
November 2011 - Sri Lanka pays China $40 million to blast a boulder blocking the usage of the port a year after opening.
September 17th, 2012 - Exim Bank loans Sri Lanka an additional $809.35 million for construction of the second phase. The new loan agreement also allows China Harbour Engineering and China Merchants Group to jointly operate the terminal and take 65% stake for 35 years and the first loan receives a 6.3% interest rate.
2014 - Hambantota Port was struggling financially and could not attract businesses to dock there. China began demanding loan repayment for construction of the port, which Sri Lanka could not pay due to the lack of profit.
November 2014 - Chinese military submarines begin docking at the port.
January 8th 2015 - Sirisena is elected into office, and takes on the country’s $64.9 billion debt.
December 2016 - SLPA & CMPHCL sign an agreement to sell China 80% of the shares, or $1.12 billion, of the port for a 99-year lease, including all land of the property.
May 2017 - Sri Lanka takes out an additional $1 billion loan out of the China Development Bank to help pay back debt.
July 2017 - Opposition parties in Sri Lanka denounce the agreement between the SLPA & CMPHCL, and a new agreement is reached that states that the Chinese company must divest a maximum of 20% within the next decade to Sri Lankan enterprises. Also, the new agreement bars foreign countries from docking military vessels at the port, at the request of India.
July 2018 - Sri Lanka moves a naval base to Hambantota, raising concerns from India and the United States.
2019 - China Merchants Group announces a 136% increase of vessel usage at the port and fully automates and expands facilities.
May 2024 - Hambantota Port has become a main shipping importer of cars into Sri Lanka, with a monthly turnover of 700,000 vehicles. Chinese-owned oil refineries have opened at the port and the port has become much more economically feasible.

Funding and Financing

The construction of the Hambantota International Port has been financed through a private-public partnership with a joint venture between the Sri Lanka Ports Authority and the China Merchants Group. Originally, SLPA had full ownership over the port, but as the 2016 agreement between the SLPA and China Merchants subsidiary China Merchants Port Holdings Company states, CMPHCL owns 80% of shares, with SLPA owning the other 20%. The construction of the port was also largely financed through a set of buyer’s credit loans (BCL), preferential buyer’s credits (PBC) and government concessional loans (GCL) from the China Export-Import Bank. The first of these loans amounted to $551.58 million on December 30th, 2007. This loan, for the first phase of the project, originally accrued an interest rate of around 2%, but was then raised with the onset of the second loan to 6.5%. The second loan reached $808 million, which was agreed upon on September 17th, 2012, with a much lower interest rate of 2%.

Notably, the funding for this project has also faced extreme controversy. It was found that the exorbitant costs and interest rates were uncontested by the Rajapaksa Administration. For example, China Harbour Engineering Company, one of the contracted construction companies, charged Sri Lanka $40 million to remove a boulder blocking usage of the port in 2010. Diplomats criticized the expensive cost, citing that the companies were overcharging. It was also found that $7.6 million in the port construction fund were directly given to Rajapaksa campaign aides, with an additional $1.7 million given to Rajapaksa himself.

Institutional Arrangements

In the early 2000's the Sri Lankan government had the idea to build a deep sea port in Hambantota as way to boost their economic growth. This project was originally to be overseen by a government owned entity called The Sri Lanka Ports Authority (SLPA), the project was missing funding which is why Sri Lankan government sought investments from countries like the USA and India and when denied ultimately led them to fall into Chinas Debt trap diplomacy. Debated by many sources it is argued that Chinas intentions were not to take over the port, but ultimately in a common series of event the Chinese investment overwhelmed the Sri Lankan Government and entities who could not afford the port thus leading to the Sri Lankan Government to lease the port to (CMPorts) China Merchant Ports Holdings with a deal valued at approximately 1.1 Billion which would only provide short term relief for their financial debt, and losing them control over one of their most valuable and tactical assets, and this is what causes this situation to be identified as a Debt trap diplomacy move from the Chinese. Even though he Sri Lankan authorities still hold ownership over the port, CMPorts holds the majority authority and is the primary operator of the port after originally the Sri Lankan port authorities were to operate the port. This is an example used among the world to describe Chinas Debt trap Diplomacy and also a failure of a Public-Private Partnership (PPP) between Sir Lankan government owned entities and Chinese Private entities in the form of CMPorts.

Impacts and Operations

The impact the Hambantota port has had on Sri Lanka is vastly complicated to say the least because whilst it has created a great financial strain for the nation, It has also opened up many job opportunities in an area previously lacking in development for the people on this side of the country starting from construction, to operations, Transportation, etc.. opportunity which has given a boost to the economic state of Hambantota. Despite the enormous amount of Debt taken on by Sri Lanka to make this piece of infrastructure come to life, a very strategic and valuable asset how now failed to meet the expected traffic and use in order to bring in that economic boost so sought after. Ending and yet another strain for Sri Lanka now dependent economically by Chinese Entities. Not just economically dependent for the debt owed to the Chinese but also dependent on their operation of the port after seeing them sign a 99 year lease to CMPorts a Chinese State owned entity, has given commercial operational authority to the Chinese thus also being dependent on their efforts to bring in revenue to help relieve the financial strain already being faced.

Background

Originally, the Sri Lankan government had teased the idea of building a new port in the underdeveloped south as far back as the 1970s, however, after the 2001 parliamentary elections, newly-elected Prime Minister Ranil Wickremesinghe announced the “Regaining Sri Lanka Economic Development Program”, which identified Hambantota as the site for the new international shipping port. In the following year, the Sri Lankan Government approached the Canadian International Development Agency to help finance the construction of the port. The Canadian Agency then agreed to the plan and financed the Canadian engineering firm SNC-Lavalin to conduct a feasibility report into whether building the port in Hambantota would be economically beneficial. The report supported Wickremesinghe’s ambitions in building the port, but plans failed to move forward due to Canada’s unwillingness to finance the project over concerns of contentious politics amidst the then ongoing Sri Lankan Civil War.

During his campaign for president in 2005, Mahinda Rajapaksa pledged to construct a new deep-water commercial port in his hometown of Hambantota, as an effort to ease traffic in Colombo’s shipping port, as well as bringing industry and revitalizing his underdeveloped home district. After being elected, Rajapaksa hired Danish consulting firm Ramboll to conduct a feasibility report on constructing a new international port in his hometown. Ramboll confirmed Rajapaksa’s plans by outlining a three-phase program in implementing the construction of the port through public and private partnerships. Rajapaksa used this report as means of evidence for his goals, and approached India and the United States with requests to finance this project. Both nations declined, and finally, Rajapaksa approached China, who then pledged to finance the port.

Narrative of the Case

Hambantota Port in Sri Lanka which started off as a project to gain a highly valuable asset for the country in various ways and a economic boost, how now become a valuable piece of infrastructure, and a controversial topic following the events occurred between Sri Lanka and the Chinese parties, now has spiked debated on the topics of international investment and Debt. Sri Lanka's Hambantota port a very valuable piece of infrastructure because of its strategic position and easy access to trade routes in the indian ocean is now in the control of the Chinese after signing a 99 year lease which was a last resort after being heavily in debt to Chinese investment parties which many believe was planned and many argue was not intentional.

Policy Issue

“Debt-Trapping Diplomacy”
- Many diplomats and scholars cite this port as one of the most notable examples of China’s new “debt-trapping diplomacy” policy tactics by indebting less economically-advantaged countries with massive infrastructure projects at extremely high interest rates, and then demanding repayment in a short amount of time which the debted country cannot repay. The incumbent Sirisena Administration cited that they aimed to appease India and the West but had no other option than to continue to turn to China because their debt was so high. This also plays into the broader picture of the current ongoing power competition between China and the United States, as well as between China and India. Both countries have expressed concerns over China’s growing presence in the country, especially India. Indian officials went so far as to demand Sri Lanka to include a clause in their agreement with China that foreign militaries cannot use the port in Hambantota, however China has consistently violated this clause.
- Chinese authorities and Hambantota International Port Group (HIPG) officials refute the claim that China is preying on smaller countries, citing that they were able to “pay” China $1.12 billion in equity for the port instead of racking up interest rates and plunging further into debt. China has also stated that their only mistakes were investing in countries run by “corrupt politicians.”
Modern-Day Imperialism
- China’s seizure of this port, as well as the presence of Chinese naval vessels in the port paint a concerning picture that looks eerily similar to European colonial practices back in the 14th and 15th centuries. Hambantota being only a few nautical miles from shipping lanes that account for 80% of cargo between Asia, Africa and Europe highlight the region’s, and country’s, geopolitically advantageous position. China was also extremely quick to include the port in Hambantota as part of their “Belt and Road Initiative”, which has raised alarms across the West.
Corruption
- The construction and maintenance of Hambantota International Port has been rife with reports of corruption. President Rajapaksa, who spearheaded the development of this port, was caught numerous times providing himself, his brothers, his campaign team, and supporters with kickbacks worth over millions of dollars from funds that were loaned from the China Exim Bank for construction of Hambantota.

Takeaways

The Hambantota port will continue to be a valuable piece of infrastructure today and in the future due to its very strategic location, Indian ocean access, deep water, and large vessel accessibility. The port brings forward many debated which allows us to take note of many different events that occurred like Debt trap diplomacy which is what china is accused of doing throughout this project by using debt or financial leverage to take over an asset, we see International investment and debt, some would say a failure of Pubic-Private Partnership (PPP), and Risks of being over reliant on external debt and in this case nationally external.

Discussion Questions

Was this an intentional effort from Chinese parties to use financial leverage to obtain a strategically valuable asset?

Was this the only option Sri Lanka could have taken to build this port?

Was this a successful or unsuccessful example of Public-Private Partnership?

What could China do with this piece of infrastructure they are in control of?

Reading for discussion

1) Questioning the Debt-Trap Diplomacy Rhetoric surrounding Hambantota Port

https://gjia.georgetown.edu/2021/06/05/questioning-the-debt-trap-diplomacy-rhetoric-surrounding-hambantota-port/

2)Debunking the Myth of ‘Debt-trap Diplomacy’

https://www.chathamhouse.org/2020/08/debunking-myth-debt-trap-diplomacy/4-sri-lanka-and-bri

3)Understanding China’s Investments in Sri Lanka

https://www.airuniversity.af.edu/JIPA/Display/Article/2743982/geopositional-balancing-understanding-chinas-investments-in-sri-lanka/