By DNR Samaranayaka –

DNR Samaranayaka

Since the formation of the coalition government, there has been an unprecedented interest in the Colombo Port City (CPC) Project, especially after the announcement by Mr Rajitha Senaratne, who is the Cabinet spokesperson of the new government, declaring that the project has received the approval of the cabinet. This announcement was contrary to the pre-election undertaking made by the coalition to cancel the CPC project under a coalition government. However, the announcement made by Mr Senaratne was later rejected by the Prime Minister saying that the government has not completed the review of the environmental assessment of the project. Since then there have been several announcements with the latest announcement contradicting the one before. According to the most recent announcement in early March, the government has instructed the CPC project officials to suspend the project. As the government has been giving mixed signals since its formation in January, it is not clear whether the project is abandoned, stopped temporarily or whether it will be proceeded with a modified agreement between the two parties.

If the Rajapaksa administration had returned to power at the last presidential election, the implementation of the CPC was an absolute certainty. With the change of the government, it would seem that China began to have doubts about the continuation of the project, and this uncertainty became a serious issue of concern to the Chinese government. On February 6, the assistant minister of foreign affairs, Mr Liu Jianchao, arrived in Sri Lanka for talks with the new government about the project. The decision to send a high-ranking representative highlights the level of concern about the CPC’s strategic importance to the Chinese government. Furthermore, the attendance of the Chinese President Mr Xi Jinping at the opening ceremony of the CPC on 17 September 2014 also clearly signals the immense importance of this project to the Chinese.

Project uncertainties

The most recent failures of very ambitious development projects undertaken by the Rajapaksa administration such as Hambantota harbour, Mattala airport, and Suriyawewa cricket stadium clearly demonstrate the need to understand the uncertainties about large-scale development projects. There are clearly lessons to be learnt and mistakes to be avoided. All these projects undertaken by the Rajapaksa administration were subject to extensive economic and financial analyses. They were given the green light by the project officials on the assumptions that they will bring massive financial returns to the country with thousands of employment opportunities. Only after the implementation of these projects, it became clear to the populace that they are abject failures and that even a fraction of the benefits that were predicted in their economic analyses cannot be realized. The writer, as an economist, participated in a couple of seminars on Hambantota harbour project and expressed reservations about it highlighting the mistake that the then government made by bringing a harbour to a place where the hinterland is barely developed with no activities other than agriculture. A harbour requires hinterland with thriving economic activities, large volumes of exports and imports and high density of population. Although some officials argued that the harbour is well positioned to provide bunkering services and other maritime services usually provided by a modern harbour, the harbour is now used mainly to offload shipments that carry vehicles from Japan. They are then transported to Colombo where the markets are for these vehicles. Unfortunately this arrangement has an additional cost to the buyer, which is added to the cost of the vehicle, and it will be eventually passed on to the purchaser. Such costs in turn contribute to the overall cost structure of the economy.

The Hambantota harbour is now designated as a failed project because it is unlikely to generate income to at least cover its cost. Unlike a project intended to improve the living standards of the average citizen, a development project based on commercial interests is not undertaken just to cover its costs; the project must also give a reasonable rate of interest equivalent to an alternative investment. The former government had very high expectations of the success of the Hambantota harbour, but the harbour project now performs only a fraction of the services intended to provide at the time of the project design. The Mattala airport, in particular, appears to be the worst out of the three as it is reportedly incurring immense running costs and making less than the income of a corner grocery store.

Colombo Port City project

The land area that will be reclaimed under this project is estimated at 233 hectares. The first phase of the project is the reclamation of the land by the China Communications Constructions Company (CCCC). As reported in print media, the original cost estimate of the first phase was US$ 1.4 million. However, according to an article appeared in the Sunday Observer on 30 March 2014 by Shirajiv Sirimane, the cost of the CPC has been increased to US$ 1.9 billion. According to him, this increase reflects interest charges on the investment of 1.4 billion during the first phase of the project. Mr Sirimane’s article contains detailed information that appears to have come directly from the CPC officials. In an another article appeared in the Daily Mirror on 11 March 2015, the project officials of the CPC are warning that the project costs will go up further due to the suspension of the project. They claim that some of the work that has been already completed will have to be re-done at an additional cost to the project. It is also very likely that the project overruns will also be another source for the cost to go up beyond the current estimates.

Once the reclamation is completed, the land will be divided between the two countries. According to media reports, the Sri Lanka’s share of the land will be125 hectares, and the balance 108 hectares will be the share of China, which consists of 20 hectares of land under outright ownership and the balance 98 hectares on a 99-year lease. It is also reported that out of the total reclaimed land, only 170 hectares will be used for commercial, business, and other income generating activities. The balance 63 hectares will be reserved for other purposes such as roads, parklands, and for recreational facilities. Information on how this land will be allocated between the two countries is unclear. If it is divided according to the land ownership, the share of the reduction of the land available for commercial use is 29 hectares for China and 34 hectares for Sri Lanka. Since the reserved land is a common property, both parties can use it.

China’s Interests in the project

The CPC was formally launched on 17 September 2014 with the participation of the former president Mahinda Rajapaksa and the Chinese President Mr Xi Jinping. As noted earlier, the presence of the Chinese president at the inaugural ceremony clearly demonstrates the prominence given to the project by China. This importance appears to underlie two reasons: China’s accumulation of foreign reserves and the CPC’s geo-political advantage to China.

China is the worlds’ second largest economy, after the United States. It is also the country with the largest foreign reserves with little over US$ 3.8 trillion and Japan, with about US$ 1.2 trillion, comes distant second. Having a higher level of foreign reserves is always better than having fewer reserves, but the problem of countries like China with large holdings of international currencies is to find ways of using them without adversely affecting their economies. One option available to China to manage excessive foreign reserves is to lend to countries such as the USA, the country that depends a lot on China’s foreign reserves. Another option is to invest on assets build up in countries outside China. Both options do not have any adverse implications on the economy or the Chinese currency, the Yuan. The most common options such as running trade deficits for extended periods or selling US dollars (open market operations) have adverse implications such as high unemployment and slow economic growth or an appreciation of the Yuan, and they both are not preferred options for the Chinese government. Given this domestic constraint, the CPC is an ideal project for the Chinese government since it has the potential of acquiring an asset in a fast developing region in the world and using it for China’s commercial interests. It also provides many opportunities that most other projects do not offer to China for its investments. During the infrastrutre development phase, the Chines government, as reported below, will spend around US$ 13 billion, and a major part of these investments will return to China in the form of imports of capital goods required to build infrastructure facilities. Moreover, the CPC allows the Chinese government a long-term presence in the region, pursuing various other business interests in the region.

The second reason is the geo-political advantage of this location in the Indian Ocean. As an emerging super power, its importance increases with the acquisition of fixed assets in strategic locations, and the CPC is perhaps the ideal location for this purpose because it is located in major shipping route and also because of its location close to another emerging super power in the region, India. The former government’s decision to be closer to China badly damaged the cordial relationship that existed between Sri Lanka and India in the past. Reflecting the lack of confidence on the Rajapaksa administration, some reports suggested that the Indian government played a behind the scene role to oust the former president Mr Rajapaksa. India’s concern about the CPC is purely strategic since India feels that another super power on its doorstep could cause tension between India and China, two countries that do not have a cordial relationship. In addition, the CPC is also closer to the the African continent where China has long-term economic interests in a number of emerging economies.

Reclamation cost and ownership cost

Because the CPC will be entirely funded by the Chinese government, the general perception is that this project has no costs to Sri Lanka; it only has benefits from the project claiming that the CPC is a win win opportunity by its proponents. Unfortunately, as the proverb –there is no free lunch– says, nothing can be gained with nothing because everything has a cost. Accordingly, the CPC also has a cost to the country. In fact, it has variety of costs including monetary, economic, social, and environmental. Moreover, as some would argue, it can also be the source that could destabilize the peace in the region.

As noted earlier, the total reclamation cost of the project that will be incurred by the Chinese government has been estimated at US$ 1,918 million, which is an increase of 28% or US$ 500 million compared to the original estimate. This cost can be divided into two parts: the cost of reclaiming 108 hectares (US$ 889 million) of the land owned by the Chinese government, and the cost of reclaiming 125 hectares (US$ 1,025 million) of the land owned by the Sri Lankan government. Although the Chinese government will bear the total cost of US$ 1,918 million, it only receives 108 hectares. Accordingly, the total cost to the Chinese government can be divided into reclamation cost of the land that China will own (US$ 889 million) and the location cost of the land that Sri Lanka will own (US$1,025 million). The value of the share of the land given to Sri Lanka (125 hectares) is the location cost of the project, and it is the price paid to the Sri Lankan government by the Chinese to own a block of land in the seabed. In current prices, each hectare of the Land that Sri Lanka will own will cost US$ 8.2 million (Rs 1050 million) per hectare or US$ 20,500 (Rs 2.6 million), a perch. This is the minimum amount that Sri Lanka will have to earn to ensure that at least the cost of the land given to the Chinese has been recovered.

After the reclamation of the land, the Sri Lankan government is expected to receive a bare land of 125 hectares, and further development of this land is the responsibility of the Sri Lankan government. According to an undated press release appeared on the Sri Lanka Ports Authority (SLPA) web site (http://www.slpa.lk/news_events_14075.asp), the Chinese Ambassador Wu Jinangho had said “under the second phase China will invest US$13 billion to develop the land it would own, while Sri Lanka has to develop its own land area. China will not assist Sri Lanka in developing its part of the land and it has to find its own finances to develop the land.” It is clear from the statement that providing these facilities is clearly not the intention of the Chinese government, and without these, the site has no commercial value.

Perceived benefits                      

Although he Sri Lankan government has so far not released a statement about the likely benefits of this project to the Sri Lankan people, the Chinese have already established the benefits that Sri Lanka is going to receive from the CPC. In a recent statement, the CCCC, the investor of the CPC, claims that the vision of the Port City is to establish Colombo as ultimate business and tourist destination in South Asia. The land created will attract local and international investments for shopping malls, hotels, apartments, an exhibition centre, educational institutions, health care facilities, theme parks, restaurants etc. The CCCC further states that the Port City is planned to be very much a city for people of Sri Lanka to be shared and enjoyed by all Sri Lankans. If the land comes with all the infrastructure facilities that are needed to promote investments in the manner stated by the CCCC, it may be justified provided that it has no major environmental disasters or adverse implications on the livelihood of the people living along the west coast.

If this land is to be offered to foreign investors for income generating activities, the government will have to spend millions of dollars to develop the land with roads, parking space, housing complexes, hotels, office buildings and to provide services such as telecommunication, electricity and other similar facilities. As indicated above, the Chinese are planning to allocate US$13 billion to develop such facilities in their share of the land, and it gives an indication of the investment that will be required to bring the same facilities at the same level as the facilities that will be available on the Chinese side. If the Chinese side offers much better facilities than Sri Lanka can afford, foreign investors will certainly be on the Chines side. Being the second largest economy in the world, China has opportunities to promote income-generating activities that Sri Lanka cannot even imagine to undertake. It can finance all these activities by using its massive foreign reserves, but Sri Lanka does not have this opportunity to invest without borrowing internationally. The ‘Luxury Lanka’ video available on the internet gives a glimpse of the development when the CPC is in full operation with skyscrapers and beautiful structures, and what is depicted in the video is certainly beyond imagination. Furthermore, unlike China, which can mobilize its own investors to invest on the project, Sri Lanka does not have a multibillion manufacturing or commercial sector to invest on CPC. It will have to depend entirely on foreign investors.

Financing implications of the CPC

If the decision is made to go ahead with the project, the government will have to borrow millions of dollars from international financial markets at commercial interest rates. Although the volume of Sri Lanka’s current foreign debt, which stood at US$ 36 billion at the end of 2014, does not cause any alarm, a serious problem still exists since the foreign earnings, largely from remittances, do not grow as fast as the requirement of foreign payments, including debt servicing on foreign loans. The problem has aggravated due to large-scale borrowings at commercial interest rates and investing on wasteful projects during the Rajapaksa administration. Since they do not bring adequate returns to investments, the government is compelled to ask help to meet the debt payment liabilities from lending agencies. Already a request has been made to the IMF for assistance to meet the debt service requirements, but it is unlikely that the IMF will come forward to help projects funded by the previous administration. Such bad investments not only reduce Sri Lanka’s ability to borrow at reasonable rates internationally, but also increase the possibility of the build-up of foreign debt depriving the country’s ability to borrow for development projects in the future. The financial cost of this project cannot be easily met from the country’s foreign earnings if the project becomes a failure.

Employment benefits

The CCCC officials have said that this project will bring between 80,000 and 100,000 new jobs and 90% of those will be available for Sri Lanka. These hypothetical numbers are floating around in support of the implementation of the project. As there is no basis for these estimates, they are misleading the public giving the impression that these projects provide an excellent opportunity to create very significant employment opportunities. However, the reality is that it may not create even a fraction of that number since this project offers opportunities for commercial ventures that are catering to niche markets in the World. These ventures will not require non-professional work force in large numbers as most of these commercial ventures are highly dependent on modern technology and, therefore, they do not need to depend on people, except those with high technical skills. Furthermore, if 100,000 jobs are to be created in this limited space, a significant share of the land will have to be used for roads and parking. Given this projected level of employment, this site will have to attract at least a million customers a day to keep the employees busy and to generate sufficient incomes to owners of businesses.

The deputy project manager of the CPC, Mr Chandana Gunawardane, has said that about 943 direct employees and another 5,000 in other employment categories will be affected, in the event that the project is terminated. Unfortunately, although this is an unfortunate outcome of termination, this should not be a justification for continiuing the project per se. A development project is not about the people who are working during its implementation phase; it is about the benefits of the project to the people. They are the people who share the benefits as well as those footing the bill in the event it is a failure. If the workforce is used as a justification for continuity despite the doubts about its viability, then the people who are affected by the project such as the fisher folks should asks for the termination of the project because it can affect their sources of income. Both concerns are immaterial and the only concern that is important is the realization of actual economic and social benefits.

The new government will be making a decision soon on the CPC project and this decision will be either to support the continuation of the project with or without modifications to the agreement between the parties or, alternatively, to discontinue the project. Either option has substantial implications to the country and, therefore, the government must make a decision with a view to minimizing any adverse implications on the people of Sri Lanka. If the decision is to continue with the project, the costs or benefits that are generated because of this decision will be known only in the distant future. Although the project assumes substantial economic and social benefits to the country, the certainty about any economic or social benefits cannot be guaranteed at this stage. In the absence of identifiable economic or social benefits, the CPC could be another disaster. In that event, not only the economy will suffer, but all other benefits and opportunities that have been widely discussed in relation to this project will not be forthcoming. It will also make the financial situation of the country more vulnerable. On the other hand, the government could face a massive bill of compensation, if the decision is to terminate the project at this stage. It is up to the government to make the correct decision.

*The writer is an economist and can be reached via tilaks@iprimus.com.au.