China is strengthening its grip on Colombo port after securing an agreement to build, operate, and transfer a warehousing hub within the port. The China Merchants Port Holdings Company (CMPH) will have an 85 percent stake in the warehouse facility and will operate it for 50 years. The Sri Lankan government assigned the $392 million project to CMPH, a Chinese state-owned enterprise, without open tendering.
The CMPH already has an 85 percent stake in the Colombo International Container Terminal (CICT), a star performer among Sri Lankan and South Asian terminals. The CMPH also controls Hambantota port in southern Sri Lanka, in which it has an 85 percent stake and enjoys a 99- year lease. According to CMPH chairman Miao Jianmin, the latest deal will bring its total investments in Sri Lanka to over $2 billion, making the company the single largest foreign investor in the island nation.
Another Chinese company, China Harbor Engineering Company (CHEC), is partnering with Access Engineering Ltd. of Sri Lanka and the Sri Lanka Ports Authority (SLPA) to build the Eastern Container Terminal in Colombo port. The CHEC is also the builder of Colombo Port City, which is designed to be an international financial hub.
A ‘Done and Dusted’ Deal
Shipping sources in Colombo said that they had advocated for the government to award the Colombo port warehousing project on the basis of an open tender. Instead, the government unilaterally gave the project to the CMPH, according to these sources. No other Sri Lankan or foreign party had raised this issue; as a result, the deal “is done and dusted,” as Rohan Masakorala, CEO of Shippers’ Academy in Colombo, put it.
For the purpose of setting up the warehouse, to be called the South Asia Commercial and Logistics Hub, the CMPH has set up a fully-owned subsidiary, Fortune Centre Group Limited (FCGL).
The FCGL gets the rights to name the chairman and managing director/chief executive officer, as well as appoint five directors to the project company. Access Engineering, a Sri Lankan construction company, and the SLPA, the two local collaborators, can name one director each.
The issued share capital of the FCGL will be $84 million. FCGL agreed to contribute, in cash, $58.8 million, representing 70 percent of the total. Access Engineering and SLPA each agreed to contribute $12.6 million (15 percent of the total).
Under the agreement, SLPA is not allowed “to grant any third party the right to carry out port-related logistics or warehousing services at the Port of Colombo at a rate lower than the royalty fees payable by the project company,” filings by China Merchants Port show, according to Sri Lanka’s The Sunday Times.
At the end of 50 years, the hub company “shall hand back” the leased site and “transfer all assets of the logistics center to SLPA,” the Sunday Times reported.
China Merchants Port called its stake in the logistics complex “a giant leap forward’’ for its influence in South Asia.
The warehousing project has an international strategic dimension, especially for India. After the Mahinda Rajapaksa government gave the CICT project to China in September 2011, India felt a pressing need to have a foothold in Colombo port because of its strategic and economic interest in the Sri Lankan port.
Colombo port handles 60 percent of India’s transshipment cargo and India-linked cargo, in turn, accounts for 70 percent of Colombo port’s total transshipment volume.
Since India views Sri Lanka as “an unsinkable aircraft carrier 14 miles off [India’s] coast” as the Indian diplomat Shivshankar Menon put it, India is wary about a strong Chinese presence in Colombo port. In fact, the India-Sri Lanka Accord of 1987 had anticipated a foreign presence in the ports of Sri Lanka decades ago. The accord made Sri Lanka promise that it would not allow its ports to be used by forces inimical to India. India did not have China in mind at that time, however; the bugbear then was the United States.
Following the entry of China as the principal infrastructure builder in Sri Lanka from 2011 onwards, India woke up to the need to keep China away from its doorstep. Along with its Quad ally, Japan, India fought hard to secure the contract to build and operate the East Container Terminal (ECT) in Colombo port to balance the Chinese presence there.
But the government of Gotabaya Rajapaksa reneged on an earlier promise to hand over the project to India and Japan. Gotabaya cited an electoral commitment not to give the ECT away to foreign entities and wriggled out of the pledge.
However, due to mounting pressure from India to make up for the loss of ECT, the government gave the West Container Terminal (WCT) project to the Adani Group of India. But Adani was allowed only a 51 percent stake, and not 85 percent as in the case of China Merchant Port’s stake in the CICT.
India did not hide its discomfort over the burgeoning influence of China in Sri Lanka under the stewardship of former President Mahinda Rajapaksa, who was perceived in New Delhi as anti-India and pro-China.
In July 2014, the Sunday Times reported that the Rajapaksa government had approved a proposal for the state-owned China National Aero Technology Import-Export Corporation (CATIC) to set up an aircraft base maintenance center in Trincomalee to repair and maintain Chinese-built aircraft in the Sri Lankan Air Force. It was to be built at a cost of $40.3 billion.
But apparently after India raised objections, Colombo reversed course. Then-Foreign Minister G. L. Peiris told Parliament: “No such decision has been taken to permit the establishment of an aircraft base maintenance center in Trincomalee.”
China’s control of ports in Sri Lanka is a particularly sensitive issue for India due to the potential for the facilities to be used by military vessels. In November 2014, a Chinese submarine and warship docked in Colombo. Seven weeks earlier, a Chinese submarine, a long-range deployment patrol vessel, had called at the same port ahead of a visit to Sri Lanka by Chinese President Xi Jinping. Both times India expressed serious objections.