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Asean

Controversy over Chinese investment in Sri Lanka

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Chinese investment in Sri Lanka is causing major problems for Sri Lanka’s President Mathripala Sirisena and has become a point of tension in Sri Lanka–China relations.

Author: Smruti S Pattanaik, IDSA

Before taking office, Sirisena had promised that he would look into alleged corruption, stating he would investigate how Sri Lanka is ‘being obtained by foreigners by paying ransom to a handful of persons’. His election manifesto simultaneously acknowledged Sri Lanka’s economic difficulties. It reads, ‘Sri Lanka is a country with excessive state debt and a dangerous ratio with regard to loan payment and state revenue’.

During the previous regime, led by former president Mahinda Rajapaksa, Sri Lanka borrowed billions from China to develop mega-projects that many thought were economically unviable. Critics also feared that Sri Lanka would not be able to pay back the loans and as a result China may take control of these vital infrastructure projects, providing it with a strategic presence in the country.

At the time, no information was available in the public domain regarding interest rates on the loans. There were also allegations of corruption and bribery, which may have allowed Chinese companies to secure these projects without open bidding process. As a result, the incoming Sirisena government promised that it would re-assess all mega-projects undertaken by the previous government.

One especially controversial project is the Colombo Port City project. The Colombo Port City project is being built by China Communication Construction Company (CCCC), a subsidiary of China Harbour Engineering Company, in cooperation with the Sri Lanka Port Authority. The project amounts to a US$1.4 billion investment, but — according to Sri Lanka Government Spokesperson Rajith Senaratne — the project was awarded ‘without relevant approvals’. Interestingly, the World Bank has barred CCCC on charges of corruption until 2017.

During his visit to Beijing after being elected president, Sirisena assured China that ‘the current problems facing the Colombo Port City is temporary and the problems do not lie with China’. Chinese President Xi Jinping in return expressed his hope that ‘Sri Lanka could ensure the legitimate rights and interests of Chinese enterprises’.

But in an interview with CNN Money, Sri Lanka’s Finance Minister Ravi Karunanayake said, ‘the Chinese companies used the opportunity of a corrupt regime to crowd out other companies coming in … There was no even playing field’.

Other Chinese projects have also drawn criticism for being unproductive investments and are considered bad loans. Chinese companies built the Hambantota Port, Mahinda Rajapaksa International Airport (MRIA) and a cricket stadium in the former president Rajapaksa’s political constituency, Hambantota. These are now incurring losses because they are not commercially viable. In September 2013, the interest rate for MRIA, which cost US$209 million to build, was increased from 1.3 per cent to 6.3 per cent.

Rajapaksa’s government took several steps to make the airport commercially viable. For example, according to Civil Aviation Authority 2014 Annual Report, the Rajapaksa government implemented an ‘open skies’ policy for granting third, fourth and fifth freedom traffic rights out of MRIA to foreign airlines. It also provided concessional landing and parking facilities. But MRIA attracted only 20,474 international passengers and 2984 flights according to this report. In the same year, it incurred a loss of LKR2.75 billion (approximately US$20 million).

The Hambantota Port has also not been able to return the economic dividend it promised. The port was built with a US$306 million loan, 85 per cent of which was provided by China’s Exim bank with a fixed interest rate of 6.3 per cent. In September 2014, Sri Lanka reportedly granted Chinese state-owned companies, China Merchants Holdings International and CCCC, operating rights to four berths at the Hambantota Port, providing it with nearly 65 per cent share in the project as per the agreement reached with China in 2010. But Hambantota is yet to attract investment despite being declared a ‘free port’, alongside Colombo Port, in July 2013.

The Sri Lankan government has also declared that Katunayake Export Processing Zone, Koggala EPZ and MRIA are bonded areas in an attempt to attract investors. According to the Minister of Port and Shipping the loss from the Hambantota Port in 2012 was LKR678 million (approximately US$5 million). The Hambantota Port was maintained from the profits made by the Colombo Port. The Sri Lanka Port Authority, which was earlier providing bunkering services, has now asked private companies to takeover or develop a joint venture for bunkering operations.

China has invested around US$5 billion in Sri Lanka. The Sirisena government faces a dilemma. While Sri Lanka is not in a position to spurn Chinese investment, or to repay the huge loans, it also does not know how to ensure these mega infrastructure project make profits that would help pay back the loans. It is under tremendous pressure from China on the Colombo Port City project, where CCCC is reportedly claiming to be losing US$380,000 a day. It would be financially difficult for the Sri Lankan government to provide such huge compensation in case it decides to cancel the project.

At the same time, there is enormous domestic pressure to abandon the Colombo Port City project because it has no environmental clearance and is likely to provide China a strategic foothold in the Indian Ocean, which could draw the wrath of India and the US. The Chinese Foreign Ministry spokeswoman Hua Chunying said it expects Colombo to ‘preserve Chinese companies’ confidence to invest in Sri Lanka in the overall interests of China–Sri Lanka friendliness and the fundamental interests of Sri Lanka’s national development’.

Sri Lanka has always tried to leverage its ties with Beijing in its relations with India and the West. But the previous Rajapaksa government went too far in courting China and did not consider the strategic consequences. It would be difficult for Sri Lanka to withstand Chinese pressure. But it is likely that China will not be in a hurry to take punitive action if the Colombo Port City project does not materialise. After all, Colombo continues to be a major lynchpin in China’s Maritime Silk Route and is an important partner in the larger geopolitical game.

Dr Smruti S Pattanaik is a research fellow at the Institute for Defence Studies and Analyses, New Dehli.

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Controversy over Chinese investment in Sri Lanka

Asean

ASEAN weathering the COVID-19 typhoon

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Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.

 

Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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Asean

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