Port City Is Now ‘Financial City’ ‒ Whither SL-China Relations?

The much-discussed Colombo Port City is getting a facelift. Following a tripartite agreement signed on August 12 between the Urban Development Authority, the Ministry of Megapolis and Western Development, and the China Harbour Engineering Company (CHEC) ‒ a subsidiary of the controversial state-owned China Communications Constructions Company ‒ that oversees the project, the Port City is now officially rebranded as the Colombo International Financial City (CIFC).

Work on the USD 1.4 billion mega-development project that was suspended early last year is now expected to recommence with several amendments incorporated – the most significant of which is a lack of freehold land given to the Chinese company. Any land allocated to CHEC, according to the agreement, will be on leases executed by the Government and the company will not hold land for a lease period exceeding 99 years, including any land that may be leased by CHEC to third party investors. The total area of reclaimed land to be utilised for the project has also been expanded to 269 hectares from the originally proposed 233, as a consequence of the tripartite agreement. Some 153 of these hectares will be allocated for the Government, with 45 hectares of parks and 13 hectares of beach area added, together potentially boosting what is already the biggest Foreign Direct Investment (FDI) in the country’s history to an unprecedented USD 13 billion.

A Hopeful Government

SL-China relations have been the cause of much concern long before the present government came into power. Image credit: Xinhua/Liu Weibing

A statement issued by the Government reads:

“The Tripartite Agreement encompasses the vision of His Excellency the President and the Hon. Prime Minister of Sri Lanka to create a new international Financial City in Colombo, to be governed by a new Act titled Colombo International Financial Centre Law, to be introduced in Parliament shortly. This Act envisages the creation of an ‘International Financial Zone’ within the land area to be reclaimed by the Project Company. The Financial Zone will create an environment to attract the international financial services industry by attracting reputed international banking and financial services companies to locate within the CIFC. This initiative, together with the development plans envisaged for the entire reclaimed land area, is expected to have far-reaching economic benefits to Sri Lanka and the creation of higher-paying service sector jobs.”

A Complete 180?

While this may seem quite the about-turn considering the new government came into power promising to scrap the Port City project in its entirety, the fact of the matter is that Sri Lanka is committed to either go ahead with the project or to pay compensation to the Chinese ‒ neither of which, it seems, Sri Lanka can afford to do.

Chief Economist at the Ceylon Chamber of Commerce Anush Wijesinha is cautiously optimistic.

“Did we need a new city, reclaimed from the sea, to do it? I don’t know enough to say definitively. But it is an opportunity to create a new growth driver and an added reason for international and regional investors to look at Sri Lanka. But it is only if the Government brings in the right regulatory frameworks, consistency in policies, and credible institutions to govern it, that it would gain the trust and recognition of the international investor community, and be a success,” Wijesinha told Roar.

“We are not the first to attempt it. Dubai and Doha are also in it. We have the advantage of seeing what worked, what didn’t, and do it better, so that the Sri Lankan economy truly benefits,” he added.

Too Close For Comfort?

The Ranil-Maithree coalition seems to have accepted that we can’t completely write China off. Image courtesy atimes.com

The new government, in the run-up to the polls, was also heavy on its rhetoric on not cosying up to China, but the Ranil-Maithree coalition, it appears, has gradually come to terms with the geopolitical reality that, populist sentiment notwithstanding, Colombo cannot completely write off the emerging global superpower. The Government seems to have realised that if Sri Lanka is serious about becoming a major logistical and financial hub in the region, it must allow for Beijing to play in India’s backyard, even if it means making New Delhi understandably nervous.

According to Lecturer at the International Relations Department of Colombo University Thiyagaraja Waradas, however, India need not be nervous at all.

“Our relationship with China is not a compounding factor to our relationship with India,” he told Roar.

Indeed, there is an intellectual debate currently underway in India on whether or not China is, in fact, a threat to Indian interests, he said.

It’s Complicated

Of course, marine city development is just one of many Lankan pies China has her fingers in. Sri Lanka is already 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. During the Rajapaksa administration, 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.

Waradas pointed out, however, that one could conclude that though India was reluctant to directly aid Sri Lanka’s military campaign against the LTTE for political reasons, it did tacitly support the country’s war effort by not actively hindering the process, or by standing in the way of Chinese (or Pakistani) assistance.

“China gave us aid, but India didn’t protest it. They wanted to see an end to the war. Nobody protested that. Everybody wanted to see an end to it, and that interest was completely aligned. The only concern was the way it was ended,” said Waradas.

Sri Lanka, for its part, understood the dilemma India’s central government faced at the time what with its peripheral constituencies such as Tamil Nadu strongly opposing the Sri Lankan Government’s military offensive, he said, adding that India, in turn, understands the reality Sri Lanka faces with regard to China.

Enter China

After providing much-needed military aid during the conflict, China also invested in many post-war development projects. Image credit: Eranga Jayawardena/Associated Press

Following the end of the conflict in May 2009, the floodgates opened, so to speak, leading China to invest heavily in various non-military development projects in the island, particularly in Former President Mahinda Rajapaksa’s home district of Hambantota. In the run-up to last year’s presidential and parliamentary polls, the United National Front coalition rightly contested the usefulness of these projects, but it looks as though the Yahapalana Government has been forced to bite the bullet, realising that keeping China at bay (pardon the pun) is going to be easier said than done.

Waradas, though he has no objection to continued Chinese investment in the country, is particularly opposed to the Port City project, on the grounds that it is hazardous to the environment. Dismissing the mammoth development drive as a “neo-liberal project carried out with state intervention,” Waradas told Roar that Sri Lanka had no choice but to honour the agreement and that it would be a needless burden on the taxpayer with no real benefits for the common man.

More Investments

The Colombo Port City project, which is now to be the Colombo International Financial City. Image courtesy CHEC

A lot has changed since the last time we wrote about Sino-Lanka relations, and it goes without saying that Colombo is getting increasingly closer to Beijing. In fact, a delegation led by Prime Minister Ranil Wickremesinghe is currently in China studying the country’s successful megalopolis projects at the time of writing this article.

China recently made a request to the Sri Lankan Government to allocate a 15,000-acre land in Hambantota with the goal of constructing a special economic zone (SEZ) that Minister of Development Strategies and International Trade Malik Samarawickrama reckons will result in, among other things, one million jobs.

“The Sri Lankan Government is currently assessing potential land for the venture and we are thinking of land allocation up to Monaragala and even Embilipitiya for this as well,” the Minister told journalists late last month.

A Free Trade Agreement (FTA) signed with China is expected to focus on apparel, tea, gems and jewellery, rubber, coconuts, and spices as key industries. Plans are also underway to include a priority tariff line for competitive Sri Lankan products.

According to LBO, however, the proposed SEZ will not be exclusive to the Chinese, as India, Singapore and Japan have also expressed interest in starting ventures in the area in question. Sri Lanka is to also expected to sign FTAs with India and Singapore, with India reportedly keen to push forward discussions on the Economic and Technology Cooperation Agreement (ETCA). A delegation of representatives from Singapore is expected to arrive in the island mid-August.

Excerpt from the Daily FT report:

“Under the current timeline, the Government hopes to conclude discussions with India and Singapore by December 2016 while the FTA with China could be signed as early as the first quarter of 2017. Currently the Government has formulated a document, referred to as the Working Draft, outlining Sri Lankan targets for ETCA and areas for future discussions, which would be released over the next few days on the Development Strategies and International Trade Ministry website to promote transparency.”

Waradas warned that the FTAs to be signed with China and India could prove disastrous to the Sri Lankan economy.

“[The FTAs] will expose the country’s political and economic structure to sudden fluctuations in Indian and Chinese markets and make our society more vulnerable to the changes that can occur in China and India, similar to Nepal, when India imposed a de facto embargo on Katmandu,” he said.

Confused Foreign Policy?

Could all of this be interpreted as a sign that the Government is at a loss for ideas when it comes to managing strategic and economic ties?

Wijesinha is of the opinion that Sri Lanka needs to be smart about how it handles China. Speaking to Roar on China’s growing influence on the Sri Lankan economy, Wijesinha said that it is better to have China on board than to let projects like the Mattala International Airport become total white elephants.

“The reality is that China has the capital and is looking to export it. China today is what Japan was in the 1980s. They’re aggressively seeking outward FDI opportunities, and Sri Lanka is one such opportunity. It also ties in with the Chinese government’s One Belt One Road and Maritime Silk Route strategy. We need to cleverly latch on to this in a way that benefits us. Better to get Chinese FDI than Chinese loans. Better to have investors into Mattala, Chinese or otherwise, than let it become a concrete wasteland,” he said.

Provided that certain conditions are met, there is no harm in allowing China to invest in Sri Lanka, said Wijesinha.

“The reality is that Chinese companies are going global and have clinched investment deals from Asia to Europe. So long as they meet the environmental and other criteria that we put on any foreign investor, and the projects fit in with our strategic economic goals, we should be very open to Chinese investment,” he added.

When asked about what Colombo’s steadily increasing closeness to Beijing means for the country’s economic ties with big brother India, Wijesinha said if it came down to it, Sri Lanka would have to make a choice.

“My take is ‒  let’s be open in how we attract investment. Open up the projects; open up the deals. No special deals granted to the Chinese that raise eyebrows and the same goes to India or any other party. Then whoever has the best offer with the best price will get it. If India doesn’t grab the opportunities and put in the capital, then it would have to expect to be left out of the party. Sri Lanka needs to be pragmatic and open,” he explained.

Despite his reservations on the Port City, Waradas, too, is in favour of seeking further Chinese investment.

“To say that Chinese investments are merely profit-driven is an understatement. We’re part of their strategic plan. We’re not an exception. But that strategic plan comes with emphasis on an economic drive. It’s not that they want to make profits here. The Hambantota harbour is an example of strategy-driven economic investments. Indian investments are more profit driven, because those investments are being made by the private sector. Chinese investments are often made by either the state or by companies owned by state entities. We need to understand the nature of the capital flow from China and India to our country,” said Waradas.

Way Forward

China – an ally we need to hold on to? Image courtesy Reuters

China was Sri Lanka’s friend in difficult times and continues to be an important ally. It is currently Sri Lanka’s single biggest source of FDI and lends heavily to the country; Chinese tourists also account for the vast majority of tourist arrivals in Sri Lanka (roughly 14.5% as of July 2016). While it is important to repair the strained relations with India and the Western world, it is clear that, going forward, Sri Lanka ought to keep China on her side, without needlessly antagonising the island nation’s traditional friends to the north and in the West. Whether or not the Government will succeed in striking this delicate balance remains to be seen.

Featured image courtesy: Reuters/Kim Kyung-hoon

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