News ≫ Sri Lanka’s China Enclave: Set To Boom Or Bust?

Sri Lanka’s China Enclave: Set To Boom Or Bust?

Sep 8, 2016
Facebook Twitter Google+ LinkedIn Email
by Wade Shepard
Hambantota isn’t just a place in Sri Lanka, it’s a symbol. What started out as a gargantuan project to transform an undeveloped swath of Sri Lankan jungle into the country’s number two city — an industrial and logistical epicenter in the heart of the Indian Ocean — turned into a metaphor for opaque government dealings, poor planning, the flippant use of public funds, and token rivalries between political factions.
The apparent diametric opposition between Sri Lanka’s current president, Maithripala Sirisena, and former president, Mahinda Rajpaksa, continues, and the fate of a glut of major Chinese-invested infrastructure projects hangs in the balance.
Sirisena unexpectedly won the presidential election and took office in early 2015 after running on a platform which lambasted the incumbent for his dealings with China, which were alleged as being corrupt, absent of proper feasibility studies, lacking due political process, and burying the country in billions of dollars of debt.
The projects in question include the Hambantota developments — Mattala International Airport, which is more than likely the world’s emptiest international airport, a $1.4 billion deep sea port, a seldom used conference center and cricket stadium, and hundreds of kilometers of new highways — as well as the $1.4 billion Colombo Financial City.
These are all projects which were nearly completely funded with Chinese money via loans or, in the case of the financial city, Chinese FDI, and are major parts of China’s broader 21st Century Maritime Silk Road endeavor, which aims to establish an enhanced network of ports spanning from one side of Eurasia to the other.
When the new government came to power in Sri Lanka it found itself the inheritors of these massive, expensive projects, which were almost invariably at mid-points of development and still needing large amounts of additional funding and political love and care. This put the new administration in a compromising situation with two unappealing courses of action:
1. Bite the political bullet, stay the course and continue developing the projects of the former president that they very publicly criticized.
2. Cut their losses and liquidate the projects completely, leaving the country laden with half-finished white elephants that they must pay back the loans on regardless and face political and economic retribution from China.
Currently, the government seems to be vacillating between both extremes.
On the one hand, there are big plans underway to enhance Sri Lanka’s big China-backed infrastructure projects. Ranil Wickremesinghe, Sri Lanka’s prime minister, recently made the bold claim that Mattala International Airport, which currently serves a mere 10-20 passengers on a good day, will be handling a million visitors within five years. Colombo Financial City (formerly Colombo Port City) has worked out many of its kinks and is back in full swing.
Phase two of the Hambantota deep sea port is also back online. China recently requested 15,000 acres of land near this port to create a much-needed industrial zone. There has also been a recent proposal to create a Colombo-Kandy-Hambantota economic corridor, which will better integrate Hambantota with many of Sri Lanka’s more established cities. The governments of China and Sri Lanka even formed a committee to devise ways to salvage the Hambantota project.
So there are some very clear movements being made on the part of both China and Sri Lanka to continue developing their joint projects, which at this point may very well be too big to fail — i.e. beyond point of no return.
On the other hand, while Sri Lanka’s current government is taking measures to continue developing the big infrastructure projects that the previous administration started, they also seem to be succumbing to the market realities of the situation in Hambantota, and appear to be deescalating some of the more vital aspects of the endeavor.
Sri Lanka’s port minister Arjuna Ranatunga recently stated that several important investments that were approved for Hambantota may instead be transferred to Trincomalee, a newly initiated port/industrial zone in the northeast of the country that is being financed and developed with help from Singapore.
The investments in question include an Indian-backed sugar refinery and a Pakistani cement plant. None of these projects, which were approved by the former administration, actually got started in Hambantota, as the requisite industrial zone was never built and adequate investor momentum hasn’t yet materialized.
While just a couple of years ago new hotels were intentionally being moved from Colombo to Hambantota as a way to spur development there, the opposite is now occurring. It was recently announced that funds which were destined for a new Hyatt Hotel in Hambantota will instead be put towards the Colombo Hyatt, and the former project will not commence anytime soon.
As for the Mattala airport, even though the prime minister recently spoke hopefully about it, just a month and a half ago Sri Lanka was taking Expressions of Interest from private companies looking to take it off the government’s hands. This was in addition to other equity in Hambantota that Sri Lanka reportedly offered to China in exchange for debt relief.
New city building is obviously an expensive, long-term endeavor which requires many years of governmental attention and a continuous supply of funding. China can see even their largest projects through to the end because it has the money to last out decades of no returns, generally own and operate the banks which provide the funding, as well as the political will and entrepreneurial population necessary to build adequate momentum.
China never gives up on its ghost cities for good reason. But Sri Lanka is not China, and Hambantota — a massive new urban development out in the middle of a jungle — is perhaps a bolder initiative than any new city project that China has ever attempted domestically.
Whether Hambantota will boom or bust is currently unclear, and mixed messages from Sri Lanka’s government are rife. But what is unquestionable is that this project is a good model through which to view how China responds to drastic shifts in government policies, economic turmoil, and contending geopolitical influence in the countries it is now making large-scale development investments in along the Silk Road Economic Belt and Maritime Silk Road.

Latest News