Confusion over Lankan port deals may stymie FDI in maritime sector


By P.K. Balachandran

Continuing confusion over the terms of foreign participation in the development of Sri Lanka’s ports threatens to stymie Foreign Direct Investment (FDI) in the island nation’s maritime sector.

It is not only the Hambantota port, but the Colombo port’s East Terminal and the to-be-constructed Trincomalee port that have become victims of policy confusion, secret maneuverings, and political wrangling both within and outside the government.

The controversial Sino-Sri Lankan agreement on the Hambantota deep water port in southern Sri Lanka is likely to go through another revision by August 8, its second in a tortuous saga which began in 2008.

President Maithripala Sirisena told the Sri Lanka Ports Authority (SLPA) on Tuesday (1 August), that the agreement that his government had signed with the China Merchant Port Holdings Company (CMPort) on July 29, will be amended to the advantage of the SLPA.

Answering criticism from the media and the Joint Opposition that the deal, as it stands, is disadvantageous to Sri Lanka because the business part of it will be entirely with the Chinese company, the President said that a revision will be discussed with the Chinese company and a new agreement will be tabled in parliament for a debate on August 8.

The trade unions of Sri Lanka’s port and petroleum sectors, supported by the Marxist-nationalist Janatha Vimukthi Peramuna (JVP) and the Joint Opposition led by former President Mahinda Rajapaksa, are demanding that the bunkering business be taken over by the SLPA as it is a profitable line.

At present bunkering is to be handled by a company in which CMPort has 85% share and SLPA, only 15%.

The unions had gone on a strike over this demand last week. They gave it up only when President Sirisena assured them that he would do justice to them. Therefore, in all likelihood, the Sri Lankan negotiators will try to persuade CMPort to hand over bunkering to SLPA.

In his defense, the President told the SLPA and its unions, that it was at his insistence that the present agreement has a clause enabling the two parties to amend it at any time by mutual consent.

Dodging Parliament

The existing agreement was to have been discussed in parliament last Friday, as per the President’s wish, but the debate was not held, ostensibly because of disturbances in the House (on another issue) that day. But the agreement was signed amidst tight security on Saturday without a debate.

Later cabinet spokesmen Rajitha Senaratne and Daysiri Jayasekera said that the matter could not be debated because a “certain foreign embassy” had put through a call to an opposition MP, upon which the fracas occurred in the House necessitating adjournment. He would not divulge the name of the country concerned. Such statements could cause bad blood and further confusion.

If amended again, the deal with China over Hambantota port will have been amended twice since an agreement was first signed in 2008. The first amendment was in December 2016 when a Framework Agreement was arrived at.

Contours of July 29 deal

As per the amended agreement signed on July 29, two companies will be formed to run the Hambantota port: one is the Hambantota International Port Services Company Ltd., (HIPS) with a capitalization of US$600 million; and the other is the Hambantota International Port Group Ltd (HIPG) with a capitalization of $794 million. The total investment in the port will thus be approximately: US$1.4 billion.

The understanding is that CMPort will bring in US$1.12 billion immediately and an extra US$600 million soon to make the port fully functional.

In HIPS, the shareholding will be: CMPort, 49.3% and SLPA 50.7%; and in the HIPG, it will be CMPort 85% and SLPA 15%.

Overall, with the two companies together, the share distribution will be 69.55% with CMPort, and 30.45% with SLFP as per a government communiqué.

The HIPS will look after port services and security, and the HIPG will handle the business and infrastructural expansion part. The Chinese company has also been given a certain amount of land to set up an Economic Zone to give the port the required hinterland.

CMPort will give royalty and dividends to the SLFP. The port will be leased out to CMPort for 99 years, but there are provisions to enable the SLPA to buy shares from the CMPort after a lapse of time.

The agreement says that no foreign military vessels can enter or use the port without the Sri Lankan government’s express permission, a condition which is meant to satisfy India.

The share distribution that is envisaged now is touted as being better than the one envisaged in the December 2016 Framework Agreement, which stipulated that 80% will go to CMport and 20% to SLPA for the first ten years of operation. Thereafter the distribution would be 60:40.


However, critics point out that out of the 50.7% held by the SLPA in HIPS, 8.7 % will be from the HIPG, which is 85% under the control of CMPort. Therefore, the actual stake of the SLPA will be less than 50.7% and the majority stake will actually be with HIPG, in which CMPort has 85% stake.

The port will thus be under the control of CMPort for all intents and purposes except security.

The government went into the deal in order to get US$1.12 billion immediately to help it pay back debts. The port has been unable to repay the debt incurred by it as it has not been getting custom apart from motor car carrying vessels which are forced to dock there by the government.

Rajapakasas’ threat of nationalization

Meanwhile, the former Economic Development Minister, Basil Rajapaksa, has said that when the Rajapaksa faction of the Sri Lanka Freedom Party (SLFP) captures power, it will “nationalize” the Hambantota port.

The Joint Opposition leader and former President Mahinda Rajapaksa, has come out strongly against the July 29 agreement saying that family silver has been alienated for a paltry sum of US$1.12 billion. He called it the “worst agreement” that Sri Lanka has signed since the India-Sri Lanka Accord of 1987.

He stated that the government should have accepted the proposal on Hambantota port made by the China Harbor Engineering Company (CHEC) in 2015.

The CHEC had proposed that the share division be 65:35 (CHEC getting 65% and SLPA 35%). The CHEC would also make an upfront payment of US$750 million. The arrangement was to last for 50 years with the CHEC and SLPA sharing the profit.

In October 2015, the SLPA told government that it favors the CHEC proposal and not the one made by CMPort. But government rejected it and went in for the proposal submitted by CMPort which envisaged a 99-year lease; a 80:20 share distribution and an upfront payment of US$1 billion by CMPort.

Absence of feel good factor

Incidentally, skeptics noted that the Hambantota port agreement and the ill-fated India-Sri Lanka Accord were signed on the same day, July 29!

The Accord had invited the wrath of the Sinhalese majority and has only been partially implemented since then. Political commentator and former diplomat, Dayan Jayatilleka, recalled that Maithripala Sirisena and Mahinda Rajapaksa had led the anti-India agitation when the Accord was signed on July 29, 1987.

Turning to the Hambantota deal Jayatilleka said: “Although Sri Lankans are not ill-disposed towards China, the feel-good factor is missing in the matter of the July 29 agreement with CMPort. Sri Lanka has leased out a strategic asset to a foreign entity and this is not liked.”

The diplomat turned political commentator wondered if there was something “fishy” in the government’s signing the agreement with CMPort by-passing parliament. An uproar in the House on an unrelated issue on the day it was to be debated (last Friday), was used to avoid a debate on the agreement though it was promised.

Jayatilleka said that there is dissent within and outside the government which made Prime Minister Ranil Wickremesinghe and the coterie around him “fast track” the signing of the deal.

“The President wanted a parliamentary debate,” he asserted. And true enough, the President openly said on Tuesday, that the deal may be amended after a parliamentary debate on August 8.

Colombo East Terminal and Trincomalee Port

A consortium with Indian companies and a Bangladeshi firm were to compete for the Colombo port East Container Terminal, and tenders were floated in mid 2016. But somewhere along the way, government said that it was re-framing the tender conditions. However, no decision was taken.

On Tuesday, President Sirisena said that “under no circumstances” the East Terminal would be leased or sold to a foreign entity. Apart from this, there is no clarity about the government’s stand on the tender.

Two Indian companies, Shapoorji Pestonji and the Container Corporation of India, and a Bangladeshi company, Summit Shipping are in the fray awaiting the government’s decision.

The other worrying factor is the “fallout” of the Hambantota port deal on the deal to be struck on the Trincomalee harbor and the 100 giant oil tanks there, Dayan Jayatilleka noted.

India is believed to be wanting to participate in the development of the Trincomalee port and its environs, and there is a Sri Lankan government plan to have it done jointly by India and Japan. The government wants to balance concessions to China and India to keep both the Asian powers happy.

But the Sri Lankan political class is against giving any more concessions to India. There is a concerted move, even within the government, not to give any more projects to India. There is an effort to take away or dilute concessions given to India already, as in the case of the Trincomalee oil storage tanks.

(– P.K.Balachandran is a senior Colombo-based journalist currently writing on the countries of South Asia. He can be contacted at pkbalachandran11–)

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