In Hambantota, instead of waiting for phase 1 of the port to generate revenue as the Ramboll team had recommended, Mahinda Rajapaksa continued with phase 2, turning Hambantota into a container port. In 2012, Sri Lanka borrowed an additional $ 757 million from the China Eximbank, this time at a post-financial crisis interest rate reduced by 2%. Rajapaksa took the liberty of giving his name to the port.
In 2014, Hambantota was losing money. Realizing that it needed more experienced operators, SLPA signed an agreement with China Harbor and China Merchants Group to jointly develop and operate the new port for 35 years. China Merchants was already operating a new terminal in Colombo Port, and China Harbor had invested $ 1.4 billion in Colombo Port City, a lucrative real estate project involving land reclamation. But as lawyers draft the contracts, a political upheaval is taking shape.
Rajapaksa called a surprise election for January 2015 and in the final months of the campaign his own health minister, Maithripala Sirisena, decided to challenge him. Like opposition candidates in Malaysia, the Maldives and Zambia, the outgoing president’s financial ties with China and allegations of corruption have been a powerful campaign engine. To the shock of the country, and perhaps hers, Sirisena won.
High payouts on international sovereign bonds, which accounted for nearly 40 percent of the country’s external debt, put Sirisena’s government in dire fiscal straits almost immediately. When Sirisena took office, Sri Lanka owed more in Japan, the World Bank and the Asian Development Bank than in China. Of the $ 4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota. The central bank governors under Rajapaksa and Sirisena don’t agree on much, but they both told us that Hambantota, and Chinese finance in general, was not the source of the country’s financial distress. .
There was never a fault either. Colombo organized a bailout from the International Monetary Fund, and decided to raise some much-needed dollars by leasing the underperforming Port of Hambantota to an experienced company, just as Canadians had recommended. There was no open bidding, and the only two bids were from China Merchants and China Harbor; Sri Lanka chose China Merchants, making it the majority shareholder with a 99-year lease, and used the $ 1.12 billion cash injection to bolster its foreign exchange reserves, not to repay China Eximbank.
Before the port episode, “Sri Lanka could sink into the Indian Ocean and most Western countries would not notice it,” explained Subhashini Abeysinghe, research director at Verité Research, a think tank independent based in Colombo. Suddenly, the island nation figured prominently in foreign policy discourse in Washington. Pence expressed concern that Hambantota could become an “advanced military base” for China.