A couple of weeks ago, we reported on the rebranding of the Colombo Port City to the Colombo International Financial City (CICF) and what it means for Sino-Sri Lanka relations in the grand scheme of things. This week, we’re going to take a quick look at what the proposed CIFC entails in terms of infrastructure development and also dwell a little on the overall geopolitics at play.
To say that the Port City project has been a controversial one from the get go would be an understatement. Much has been written about its feasibility or lack thereof, possible environmental harm, and other costs involved. It has also been argued, however, that the project could be good for Sri Lanka in terms of foreign direct investment (FDI) and has the potential to transform the country into an international logistics and transshipment hub.
The Yahapalana Government ‒ the very same one that came into power promising to scrap the project in its entirety ‒ has now embraced it, albeit with some small but crucial changes.
On August 12, the Secretary to the Ministry of Megapolis and Western Development, on behalf of the Government of Sri Lanka, signed a tripartite agreement with the China Harbour Engineering Company (CHEC) and the Urban Development Authority (UDA) to recommence construction work on the project that was halted over one and a half years ago.
The suspension of construction on the USD 1.4 billion project came at a price. CHEC, a subsidiary of the controversial state-owned China Communications Construction Company, demanded compensation. The Government, as we reported previously, is committed to either pay this compensation [and more], or go ahead with the project. The choice should be obvious.
According to a statement issued by the Ministry of Megapolis, the new tripartite agreement replaces the old agreement signed by the previous government on September 16, 2014.
The GoSL, in its statement, enthusiastically notes the “many features that are beneficial to Sri Lanka that was lacking in the 2014 agreement.” The following are two key changes:
- CHEC will not be granted any freehold land as envisaged under the agreement entered into by the previous government. All lands to be allocated will be on leases executed by the Government and under no circumstances will the Project Company get any land for a lease period of more than 99 years. Furthermore, when the Project Company attracts investors to its lands, such lands will be leased to such third party investors also on a 99-year lease executed by the Government.
- The entire reclaimed area of 269 hectares will be first declared as a territory of Sri Lanka under the Lands Ordinance by President Maithripala Sirisena. Thereafter, the reclaimed area will be declared as an area of authority under the UDA Act and/or the proposed CIFC Law.
Please note that the full agreement has yet to be made available to the public, and therefore we have to work with what’s already available in the public domain.
Other benefits, according to the Ministry, include:
- Land allocated for public use such as roads, parks, and sidewalks has been increased by 44% from 63 ha to 91 ha.
- 45 ha of those public areas ‒ an area 8 times as big as the Galle Face Green ‒ have been allocated for parks and other recreational facilities. There will be an additional 13 ha of beach areas also for public use.
- CHEC has agreed to consider an additional investment to construct a CIFC building, following the conclusion of a feasibility study being conducted in consultation with the Government.
This one’s important:
- According to the statement issued by the Ministry, the previous agreement had placed the entire burden of providing utility and infrastructure connections to the periphery of the reclaimed land area on the Government ‒ with CHEC laying all infrastructure within the reclaimed area. As per the tripartite agreement, the Government can request CHEC to enter into a Public-Private-Partnership (PPP) for the provision of such infrastructure.
- Previously, maintenance of the reclaimed area and associated infrastructure therein had been the responsibility of the Sri Lanka Ports Authority (SLPA). Now, a joint venture between CHEC and a party to be nominated by the Government will undertake the Estate Management responsibility on a self-financing basis.
- A restriction that had been placed on the Government on any future development activities to be undertaken on marketable lands allocated to the Government for three years (after the reclamation) has been relaxed. This is so that the GOSL can, without any restriction, commence development of exhibition and convention centres, hospital and medical facilities etc.
- CHEC will meet all costs incurred by the Megapolis Ministry in undertaking the environmental studies (including studies already completed) and allocate Rs. 500 million to meet the costs of the fishery community livelihood improvement programme.
The Ministry also states that the suspension of the Project was a result of what it called an incomplete environmental study.
“This was rectified by this Government via a comprehensive new Supplementary Environmental Impact Assessment study. This study further restricted the area from which sand could be obtained to more than 3-4 km from the shoreline and sand to be dredged by scraping the sandy areas of the ocean floor only up to a depth of 3 meters (leaving at least ½ meter of sand at the ocean floor), and at areas where the water depth is more than 15 meters. Therefore, this will eliminate any possibility of coastal erosion. Moreover, the new Development Permit issued by the Department of Coast Conservation in 2016 contains 70 conditions designed to protect the environment (almost double the number of conditions issued under the 2011 Permit),” said the Ministry in its statement.
A very rosy picture indeed, if we take the official account at face value.
Not As Black As It’s Painted?
According to Head of Economic Research at Verité Research Subhashini Abeysinghe, if Sri Lanka is serious about becoming a maritime and logistic hub in the region, the Government has to think in terms of making Colombo a headquarter regional city, à la Singapore and Rotterdam where regional headquarters of multinational companies as well as global logistics and shipping companies operate from freely. And the CIFC just may be the best way to go about it.
“Our greatest asset is the connectivity we provide, and Colombo should tap on that asset, because we don’t have a lot in terms of resources or a market for foreign investors. It is all about how we can get these global companies to come here. You can’t have a hub unless you have global companies operating here,” Abeysinghe told Roar.
With the advent of the Port City and the proposed Megapolis project, she said, the Western Province in general, and the city of Colombo in particular, could potentially be a vibrant and sought after location for global corporations to do business in.
Not everyone shares this sentiment, however. Development Economist Dr. Muttukrishna Sarvananthan is opposed to the CIFC on the grounds that it was something that was forced on Sri Lanka.
“I don’t think it was a project initiated or solicited by the Government of Sri Lanka or anyone else in the private sector from Sri Lanka. As a matter of principle, it is the GoSL which should identify the requisite projects (economic or social infrastructure or any other including manufacturing) according to the needs of the population and solicit investments from local and/or international investors,” he told Roar.
Investors, particularly those aligned with foreign governments, said Dr. Sarvananthan, should not be allowed to propose projects according to their whims and fancies, be it the Colombo Port City proposed by the Chinese government or the Sampur coal power plant proposed by the Indian government.
Dr. Sarvananthan also believes the name change from Port City to Financial City is indicative of the Government’s true intentions.
“This conversion means the Government is not aiming for a maritime and logistics hub, but an international financial centre. Since Singapore to the east and Dubai to the west of Sri Lanka are already functioning as ports and logistics hubs, there would be very little market left for Sri Lanka to capitalise on,” he said.
“The financial sector in Sri Lanka is stymied/strangulated by the domination of the state-owned banks, insurance companies, and non-bank financial institutions. The fiscal and monetary policies in the country are skewed by the dominance of the state in the financial sector. Under the circumstance of this structural paralysis, there is very little scope for a financial hub in Sri Lanka. Before Sri Lanka aspires to become an international financial hub we have to liberate the financial sector from the dominance of the state banks, insurance companies, and non-bank financial institutions,” he said.
Juggling New Delhi and Beijing
That the Financial City will go ahead is now more or less set in stone. However, the question, according to Abeysinghe, is that if and when Sri Lanka does become the much-hyped transshipment hub, how will the Government balance the geopolitical interests of India and China in the Indian ocean?
Abeysinghe pointed out that a lot of logistic hubs around the world have historically taken a neutral position with regard to international disputes. (It is no secret that China’s continued presence in Sri Lanka has made New Delhi more than a little uncomfortable).
“Within the South China sea, there are a lot more geopolitical and security issues than there are in the Indian Ocean. Generally, Singapore takes a neutral position because at the end of the day they want to trade with everybody. Rotterdam in the Netherlands is another examples. You don’t want to get caught up in the fights of other countries, because your business comes from everybody and you want everybody to be comfortable doing business with you,” she said.
It goes without saying that the Government needs to ensure that China’s heavy involvement in port development does not give rise to security concerns for India.
“At the end of the day, India is our biggest asset in becoming a hub. Global companies would want to come to Sri Lanka and the subcontinent. And Sri Lanka provides the best connectivity to the region,” said Abeysinghe.
Dr. Sarvananthan concedes that the expanded Colombo Harbour is among the handful of public enterprises in Sri Lanka making real profits. However, he said, this is due to a single client, viz. India.
“Over 70% of the earnings of the Colombo Harbour are derived from transhipment trade from India. Sri Lanka cannot become a maritime and logistics hub relying just on one client country. As and when the proposed Sagar Mala project in India is fully realised, then we will lose even this single market,” he told Roar.
Sagar Mala Project
India is working on a port modernisation project known as Sagar Mala (literally translated to ‘garland around the sea’) that includes a proposed transshipment port on the southern coast of India, expected to directly compete with the Port of Colombo harbour. Experts have pointed out that, in order to secure its position as a regional shipping hub, Sri Lanka should take strategic steps such as developing economic zones and introducing low tariffs while consolidating its economic ties with China.
Dr. Sarvananthan believes the project is a definite cause for concern.
“The Sagar Mala project will be a serious threat to the long-term viability of the expanded Colombo Harbour,” he said.
Abeysinghe, however, is somewhat skeptical, noting that India is often slow to implement its infrastructure development programmes.
“India has always been slow in getting their act together. They’re working on a lot of harbours at the moment, having invested heavily in a port in Vallarpadam which is supposed to be a hub port and take away business from Colombo. They put the infrastructure in place just like in Sri Lanka, but didn’t really get the rest of the thing in place. So today, Indian companies don’t see an advantage in using this port, despite the future investments they’ve made. They don’t see that they will make any cost-saving by using Vallarpadam as opposed to Colombo, despite the incentives the Indian Government could give corporations,” she said.
There is also internal competition in India, much to Colombo’s advantage, said Abeysinghe, pointing out that plans are underway for a further two ports to be constructed in Southern India. Abeysinghe reckons it will take a minimum of ten years for these ports to become fully operational, giving Sri Lanka a more than adequate head start.
“There’ll be a lot of internal competition to attract international shipping lines, plus to get the hinterland trade,” she said.
“Instead of competing with the rest of the world, they’re trying to compete amongst each other, which is going to be a downside to them. Generally, even if competition does come, it’ll be five, ten years down the line because it takes a long time to develop a hub port from scratch,” she added.
At the risk of stating the obvious, laying the infrastructure is only the first step. Factors such as productivity, technology, human resources, and efficiency of institutions from the Ports Authority to Customs play a big part in the transformation from port to hub.
“Infrastructure is a basic requirement, but you can’t just build the infrastructure and think ‘now ships will come,” said Abeysinghe.
Indian bureaucracy is also a lot slower than that of Sri Lanka, she pointed out.
It must be noted, however, that ten years is not that long a time, and India is, in fact, expected to grow in leaps and bounds over the next decade. But even in such an eventuality, Sri Lanka doesn’t have much to fear.
According to Abeysinghe, the trick is to ensure that you stay on top of the game.
“If you look at Singapore, they are very keen to be one step ahead all the time and to be on the top five or top ten of any international indicator, because that is what’s driving their country. When you’re a transshipment port you have to be constantly working towards improving yourself, so others who come up do not necessarily take away your business,” she said.
A Lot Of Hype And Not Much Else?
Abeysinghe told Roar that what role the Port City can play in shaping Sri Lanka’s socio-economic future and how it’ll turn Sri Lanka’s financial capital into an attractive international city and a hub remains to be seen.
“I think it’s still too early to comment,even on the Megapolis, as we see nothing concrete. It’s a lot of marketing rather than substance,” she said.
JVP Leader Anura Kumara Dissanayake recently questioned the need to reclaim land for the Financial City, when land already available in the mainland was sufficient for construction purposes. When asked about this, Abeysinghe said that reclaiming land is a strategy that China has adopted for a long time.
“You need to understand when China engages with countries, they have a geopolitical and economic strategy. It’s not in isolation. China does not do things in isolation. So this is also part of that. Even in the China Sea they’re doing it. It’s rather controversial. They’re filling and making their own islands, creating their own cities,” she said.
Explaining China’s increasingly prominent role in shaping the world economy, Abeysinghe said that China, which considers itself a global superpower, is seeking new ways to be the next United States, and it is in Sri Lanka’s best interest to keep China on her side.
“Being part of that geopolitical and economic strategy is an advantage because nobody else will put the kind of money into all this that China is willing to. Their maritime road and belt policy is one of the biggest that China is driving. The Chinese government has pledged huge amounts of funding to make this work. In that context ‒ this is also a strategy that China adopts ‒ it is about how you fit in with China, but at the same time make sure that your interests are not jeopardised because of that,” added Abeysinghe.
Big Brother India
It’s a very fine line, however. Sri Lanka has to tread carefully, taking into consideration the sensitivities between India and China in the Indian Ocean.
“We need to play really close attention to it. I think the current Government, at least in terms of foreign relations, is better at it. But I think we can and we need to pay a lot more attention to the importance of Sri Lanka in managing geopolitics in the Indian Ocean,” she said.
“India doesn’t have the kind of money that China has. At the end of the day India may want to [invest], but they’re definitely not in that place anymore, and they really don’t have the deep pockets that China has in terms of ability to invest.”
Can We Trust China?
Dr. Sarvananthan, however, warns that any country funding projects in Sri Lanka should only be allowed following an independent economic and financial cost-benefit analysis.
“Except for the Norochcholai coal power plant and a few highways funded by the Chinese government, most of the Chinese-funded projects (especially the Mattala Airport and Hambantota Port) have not resulted in positive economic and financial returns to the people or the economy of Sri Lanka. Even the Norochcholai coal power plant has been frequently shut-down due to technical problems,” he said.
As we highlighted in our previous piece, China has her fingers in many Lankan pies. Sri Lanka is USD 8 billion in debt to China, having utilised Chinese loans over the past 10+ years on highways, ports, and an international airport that, according to Forbes magazine, is the emptiest in the world.
“Attempts by the former President the current Prime Minister to lure China into buying equities in the Chinese-funded projects in Sri Lanka have failed; which means China was/is fully aware of the non-viability of these projects. Therefore, we could conclude that China has not been a responsible or virtuous development partner in Sri Lanka; instead it has been an opportunist development partner in order to get a foothold in the neighbourhood of a volatile sub-continent. No country should be submissive to such blatant opportunism of another country,” added Dr. Sarvananthan.
It must be said, however, that China was Sri Lanka’s friend when the latter was beginning to feel increasingly isolated. China supplied much-needed military aid to Sri Lanka (amounting to USD 37 million) at a time when India and the US had turned their backs on the country at the height of the fourth and final Eelam war.
A More Hopeful View
Those who are more optimistic point out that even though it may seem that Sri Lanka is forced to go ahead with the Financial City project, the economic dividends of its successful completion could prove beneficial to the country’s economy, as long as the Government plays its cards right.
As Chief Economist at the Ceylon Chamber of Commerce Anush Wijesinha previously told Roar, the CIFC could be an opportunity to create a new growth driver and an added reason for international and regional investors to look at Sri Lanka. But of course, this all depends on how whether or not the Government brings in the right regulatory frameworks, consistency in policies, and credible institutions to govern it.
“That’s the greatest challenge. You put a lot of money into it, and it has huge potential. One reason this Government is not dropping it altogether is because at the end of the day it’s our resources, it’s loans that we have to pay. And when you do something it’s always good to make it work for us rather than let it fail,” she said.