How China Got Sri Lanka to Cough Up a Port
- The New York Times
A cargo ship navigating one of the world’s busiest shipping lanes, near Hambantota, Sri Lanka, in May. Adam Dean for The New York Times
CreditCreditAdam Dean for The New York Times
June 25, 2018
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 Mr.
Rajapaksa.
Over years of construction and
renegotiation with China Harbor Engineering Company, 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.
Mr.
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.
Ports that
China financed
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, fueling corruption and autocratic behavior in struggling democracies.
Former President Mahinda Rajapaksa of Sri Lanka, center, holding court at a wedding in Colombo in June.CreditAdam Dean for The New York Times
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 Mr. 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 centered on handing
over equity in the port rather than allowing any easing of terms.
• Though the deal
erased roughly $1 billion 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.
Mr.
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 in 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 the 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 like 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.
The Hambantota Port gets only a small percentage of Sri Lanka’s port business, overshadowed by the main complex in the capital.CreditAdam Dean for The New York Times
Sri Lankan workers processing cars being unloaded from a ship at Hambantota Port.CreditAdam Dean for The New York Times
An
Engaged Ally
The
relationship between China and Sri Lanka had long been amicable, 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 26-year civil war
with ethnic Tamil separatists — that China became indispensable.
Mr. Rajapaksa, who was elected in 2005,
presided over the last years of the war, when Sri Lanka became increasingly
isolated by accusations of human rights abuses. Under him, Sri Lanka relied
heavily on China for economic support, military equipment and political cover
at the United Nations to block potential sanctions.
The war ended in 2009, and as
the country emerged from the chaos, Mr. Rajapaksa and his family consolidated
their hold. At the height of Mr. Rajapaksa’s tenure, the president and his
three brothers controlled many government ministries and around 80 percent of
total government spending. Governments like China negotiated directly with
them.
So when the president began calling for
a vast new port development project at Hambantota, his sleepy home district,
the few roadblocks in its way proved ineffective.
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 Mr. Menon, the former Indian
foreign secretary. “It was an economic dud then, and it’s an economic dud now.”
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 United States 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, Mr. 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
Mr. 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 Mr. 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.
At least $7.6 million was dispensed
from China Harbor’s account at Standard Chartered Bank to affiliates of Mr.
Rajapaksa’s campaign, according to a document, seen by The Times, from an
active internal government investigation. The document details China Harbor’s
bank account number — ownership of which was verified — and intelligence
gleaned from questioning of the people to whom the checks were made out.
With 10 days to go before polls opened,
around $3.7 million was distributed in checks: $678,000 to print campaign
T-shirts and other promotional material and $297,000 to buy supporters gifts,
including women’s saris. Another $38,000 was paid to a popular Buddhist monk
who was supporting Mr. Rajapaksa’s electoral bid, while two checks totaling
$1.7 million were delivered by volunteers to Temple Trees, his official residence.
Most
of the payments were from a subaccount controlled by China Harbor, named “HPDP
Phase 2,” shorthand for Hambantota Port Development Project.
An expressway extension to Hambantota Port. Chinese analysts have not given up the view that the port could become profitable.CreditAdam Dean for The New York Times
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 policymaker, 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.
President Xi acknowledged the worry in a speech last year, saying, “We will
also strengthen international cooperation on anticorruption in order to build
the Belt and Road Initiative with integrity.”
In
Bangladesh, for example, officials said in January that China Harbor would be
banned from future contracts over accusations that the company attempted to
bribe an official at the ministry of roads, stuffing $100,000 into a box of
tea, government officials said in interviews. And China Harbor’s parent
company, China Communications Construction Company, was banned for eight years
in 2009 from bidding on World Bank projects because of corrupt practices in the
Philippines.
Since the port seizure in Sri Lanka,
Chinese officials have started suggesting that Belt and Road is not an
open-ended government commitment to finance development across three
continents.
“If we cannot manage the risk well, the
Belt and Road projects cannot go far or well,” said Jin Qi, the chairwoman of
the Silk Road Fund, a large state-owned investment fund, during the China
Development Forum in late March.
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 the 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.”
The Mahinda Rajapaksa International Cricket Stadium in Hambantota. The stadium has more seats than the population of the area’s main town.CreditAdam Dean for The New York Times
Pilgrim monks visiting the largely empty Mattala Rajapaksa International Airport, just 150 miles southeast from the country’s main airport.
CreditAdam Dean for The New York Times
A Port
to Nowhere
The seaport is not the only grand
project built with Chinese loans in Hambantota, a sparsely populated area on
Sri Lanka’s southeastern coast that is still largely overrun by jungle.
Mr. Rajapaksa’s advisers had laid out a
methodical approach to how the port might expand after opening, ensuring that
some revenue would be coming in before taking on much more debt.
But in 2009, the president had grown
impatient. His 65th birthday was approaching the following year, and to mark
the occasion he wanted a grand opening at the Hambantota port — including the
beginning of an ambitious expansion 10 years ahead of the Port Authority’s
original timeline.
Chinese
laborers began working day and night to get the port ready, officials said. But
when workers dredged the land and then flooded it to create the basin of the
port, they had not taken into account a large boulder that partly blocked the
entrance, preventing the entry of large ships, like oil tankers, that the
port’s business model relied on.
Ports Authority officials, unwilling to
cross the president, quickly moved ahead anyway. The Hambantota port opened in
an elaborate celebration on Nov. 18, 2010, Mr. Rajapaksa’s birthday. Then it
sat waiting for business while the rock blocked it.
China Harbor blasted the boulder a year
later, at a cost of $40 million, an exorbitant price that raised concerns among
diplomats and government officials. Some openly speculated about whether the
company was simply overcharging or the price tag included kickbacks to Mr.
Rajapaksa.
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 offload 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.
A fish stall in a zone that is due to be turned into a large industrial area surrounding the Hambantota Port.CreditAdam Dean for The New York Times
Harvesting rice in a field where the industrial area is due to be built.CreditAdam Dean for The New York Times
“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, Mr. 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 percent
after the global financial crash in 2008. (For comparison, rates on similar
Japanese loans for infrastructure projects run below half a percent.)
But to secure fresh funding, that
initial loan was renegotiated to a much higher 6.3 percent fixed rate. Mr.
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. Mr. 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 Mr. 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.
Chinese construction workers, bottom left, walking home from work in front of Colombo’s changing skyline.CreditAdam Dean for The New York Times
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.
“We
inherited a purposefully run-down economy — the revenues were insufficient to
pay the interest charges, let alone capital repayment,” said Ravi Karunanayake,
who was finance minister during the new government’s first year in office.
“We
did keep taking loans,” he added. “A new government can’t just stop loans. It’s
a relay; you need to take them until economic discipline is introduced.”
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 coming debt payment.
Government officials began meeting in
2016 with their Chinese counterparts to strike a deal, hoping to get the port
off Sri Lanka’s 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 Harbor employees heading to work in Colombo.CreditAdam Dean for The New York Times
Chinese workers in their dormitory in Colombo.CreditAdam Dean for The New York Times
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 $1.1 billion 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 percent owned by China Merchants
Port and the remaining 15 percent 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.
When the agreement was initially
negotiated, it left open whether the port and surrounding land could be used by
the Chinese military, which Indian officials asked the Sri Lankan government to
explicitly forbid. The final agreement bars foreign countries from using the
port for military purposes unless granted permission by the government in
Colombo.
That
clause is there because Chinese Navy submarines had already come calling to Sri
Lanka.
The Port of Colombo, Sri Lanka.CreditAdam Dean for The New York Times
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 of land,
solely held by the Chinese company, that Sri Lanka had no sovereignty on.
That
was dramatically demonstrated toward the end of Mr. Rajapaksa’s term, in
2014. Chinese submarines docked
at the harbor 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.
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 Mr. de Silva, the state
minister for national policies and economic affairs, put it, “Governments can
change.”
Now, he and others are watching
carefully as Mr. Rajapaksa, China’s preferred partner in Sri Lanka, has been
trying to stage a political comeback. The former president’s new opposition
party swept municipal elections in February. Presidential elections are coming
up next year, and general elections in 2020.
Although Mr. Rajapaksa is barred from
running again because of term limits, his brother, Gotabaya Rajapaksa, the
former defense secretary, appears to be readying to take the mantle.
“It
will be Mahinda Rajapaksa’s call. If he says it’s one of the brothers, that
person will have a very strong claim,” said Ajith Nivard Cabraal, the central
bank governor under Mr. Rajapaksa’s government, who still advises the family.
“Even if he’s no longer the president, as the Constitution is structured,
Mahinda will be the main power base.”
The Colombo Port City development.CreditAdam Dean for The New York Times
Reporting was contributed by Keith Bradsher
and Sui-Lee Wee from Beijing, and Mujib Mashal, Dharisha Bastians and Arthur
Wamanan from Sri Lanka.
https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html
