• The Questions Unanswered: An Analysis Of The Hambantota Agreement and the Pressing Queries The Government Refuses To Answer.

    The Hambantota Port is not a new point of discussion; from its conception till now, it has been a reoccurring theme of serious discourse. Despite popular discussion however, the current status of the port, including vital details regarding plans to privatize, the selection of the China Merchant Port, the concession agreement and land allocation procedures, is yet to be effectively communicated to the public. In the recent past the former president, H.E. Mahinda Rajapaksa, has attempted to shed light on the current proceedings of the port, recalling the preliminary proceedings that our government led. Yet it is necessary, if not essential, for those points to be reiterated ever more louder, lest the murky condition in which the port proceedings currently stand, catches us all unaware.


    The facts and figures


    For the first phase of construction of the harbor, a 450.7 million USD loan was taken, 67 million USD for the bunkering facility, and 815.1 million USD for the second phase; bringing the total to 1,332.8 million USD. In this regard, the initial loan taken in 2007, during the construction of phase one, amounted to 306.7 million USD and was taken at the interest rate of 6.4%. All other loans were taken under the interest rate of 2%. Bringing the overall interest rate for the whole project to approximately 3.1%.


    If these figures are compared with current market rates and the rates of government bonds, the true nature of the repayment system becomes easier to understand. Accordingly, overall payment, including interest, comes to around 1,761.25 million USD. To date, the Ports Authority has paid 498.53 million USD including interest. The current balance as of now stands at around 1,262.72 million USD (including interest). If, as mentioned previously, the Port was able to pay close to 500 million USD devoid of any issues, it becomes difficult to understand why a sudden setback of repayment has occurred.


    At the completion of phase I and II, the harbour would have four terminals and 12 berths. This was meant to be a free port covering an area of 2000 hectares where the goods could be manufactured, value added, and shipped overseas without a tax involvement. The first phase became partially operational in 2011 and the transshipment of vehicles began in 2012, with 70% of vehicles coming in, transshipped to other countries. In 2014, 335 vessels called at the Hambantota harbour with 295 in 2015. The port made an operating profit of Rs. 900 million in 2014 and Rs 1.2 billion in 2015.


    Discerning the long-term advantages and assessing the reality of the current negotiations

    A project such as the Hambantota Port needs to be viewed with foresight and discernment. As has been pointed out continuously, a project of such magnitude is an investment that will last and yield benefits for the country for centuries to come. This was the spirit in which our government took it on. To expect massive profits within the first few years of operationalization is both imprudent and regressive. A certain amount of time is required before the normalization of steady returns occurs. A case in point is the Port of Colombo; after its first container terminal was built in 1985, it took more than 2 decades to earn steady profits.


    As the former president has already outlined, our Government signed a Supply Operate and Transfer (SOT) management contract with a joint venture between the China Harbour Co. and China Merchant Co, for the supplication of equipment such as cranes and for the operationalization of the Hambantota container terminal, spanning a period of 40 years. The Ports Authority was to receive a rental of 35,000 USD (Rs 5.25 Million) per hectare, per year, for the 56 hectare container terminal (a total of approximately 1.96 million USD per year). In addition, a royalty of 2.5 USD on every container loaded or unloaded, wharfage of 30 USD per container for cargo coming into Sri Lanka and all other usual harbour charges for navigation, piloting, tonnage, etc. Apart from the container terminal, all other terminals in the harbour and the approximately 1300 hectare industrial zone was to be controlled by the Ports Authority. Meaning that they would earn revenue from the cargo of the free port passing through their terminals.


    The current government’s decision to disregard the management contract for the Hambantota container terminal entered in to with China Harbour Co and China Merchant Co. is a grave misconduct toward the people of this country. In his recent press release, the former president has already raised these issues, but it is fundamental that the public weigh-in on the state of affairs and assess for themselves, to understand the truth behind the current proceedings.  For instance, in addition to the misstep of the management contract, bunkering operations were also halted, resulting in huge loses to the Ports Authority. The pattern of blunders do not however end there. During our government, a terminal development project was initiated in Colombo, under the name East Container Terminal, in order to meet the initial loan repayment gap. The current regime’s unwarranted decision to stop the container handling crane purchase contract for that terminal has created a) a revenue issue and b) SLPA has now become a feeder port losing a large number of containers to private terminals. If the cranes were purchased according to schedule, by beginning 2016, there was a chance to earn 100 million USD per annum on top of existing revenue. The ‘repayment issues’ that are being cited at present would never have arisen if the crane-purchasing contract had been effectively executed.


    The current government’s decision to disregard all agreements that our government signed with several foreign and local companies, in order to lease out about 80 hectares in the industrial zone, is yet another point to end to the above list. The total expected investment was around 1,100 million USD, at a minimum rate of 50,000 USD (Rs 7.5 Million) per year, per hectare. Despite the figures and logic, sans the Laugfs Holdings agreement toward the building of a tank farm, no other agreements were considered by the current regime. The result, is that the Port loses out on the royalty fees, land lease, and minimum royalty fee that investors had agreed to pay even if they did not reach their volume targets.


    Illogical justification for the new agreement: 99 years of irreversible damage.

    Regardless of the simplicity involved in understanding the immense prospective that the Hambantota port holds for the country, the current government has from the get-go, justified its plans for privatization by insisting it was necessary in order to raise money to pay off loans that were taken to build it. But the uncanny thing, lies in the fact that even in their endeavours in relation to their decision, they seem to be choosing the course of action most detrimental for national development. For instance, in the process calling for bids, it wasn’t simply the harbour operations that were up for negotiation, but included the addition of land lordship over the entire 2000 hectare area.  Interestingly, the two companies that have presented rival bids to the present government are the same that made a joint proposal for the 40-year lease, during our government; that of China Harbour Co and China Merchant Co.


    As we’ve pointed out on numerous occasions, the current government has already moved forward, signing the framework agreement with China Merchant Co, allowing for the lease of the entire free port for a period of 99 years. This was for the sum of 1.12 billion USD on a 80:20 profit sharing basis.

    In this regard, it is important to stress a few points;

    • The ports authority will not gain any other form of income for 15 years, after which they will receive dividends for their 20% stake. And that again is only if dividends are declared.
    • There is provision for the construction of another 20+ berths and the rights over these have also been given to the lessee without considering future market values of those two terminals and their potential revenue options.
    • According to information received, China Harbour Co.’s bid was far more favourable which included a 65-35 profit sharing basis, for 50 years with an upfront payment of 750 Million USD, including the payment of all charges etc.
    • According to a report prepared by the Ports Authority, on 21st October 2015, overall expected revenue from China Merchant Holding Co. will be around 1,888 million USD, while expected revenue for 50 years from the China Harbour proposal, would have amounted to around 3,281 million USD.
    • The Government has however disregarded the report prepared by the port and selected China Merchant Holding without following the normal protocol of a government tender process; appointing instead a TEC to evaluate, and CANC to negotiate.


    Making detrimental decisions for Sri Lanka’s future & failure to follow basic transparency measures


    The reasons why the government chose the least favourable bid is beyond logic. Up-to-date, the agreement negotiated under our government still stands as the most favourable option. As has been pointed out throughout this discourse, a 99 year lease ‘impinges on Sri Lanka’s sovereign rights’. Not only will China Merchant Holding enjoy the rights of the land lordship over 2000 hectares of the free port, but would further possess autonomy to operate the entire harbour as well. The public should not get confused; regardless of the current government trying to water the issue down by suggesting it, this is not an issue with China or with foreign investors. This is about getting the best deal for Sri Lanka, which is clearly nowhere in sight right now.


    It is ironic, but not surprising, that a Government which came into power guaranteeing transparent processes, and the elimination of corruption, would select this company without following the most basic tender guidelines, and further ignoring Ports Authority reports and comments on the agreement. This has given way to an unhealthy environment for future investors, who were willing to be a part of this project. In the proposed concession agreement, there remain clauses detrimental to the development of the Port and to the country in general. Moreover, because of the way in which the agreement is currently structured, the functions presently in the hands of the Ports Authority, (including Piloting, navigation, and security) pass into the hands of the company, raising the imperative question regarding the breach of Sovereign rights.


    For instance, even though the agreement is referred to as a lease, clause 30.1 of the agreement states “the right, title and interest as applicable in and to the port property including the portions constructed by the PPP operator shall at all times during the term of this agreement, be with the PPP operator”, meaning that the rights of the title of the land will be given to the CM port which is contradictory with what the Government is saying.


    Clause 3.4 of the previous draft agreement read “in the event the PPP operator needs any further funds then, subject to the provisions of the shareholder agreement the aforementioned shareholding pattern may be changed /diluted based on the further capital contribution by the shareholders of the PPP operator, as the case may be.” But in the latest version of the agreement, clause 3.5 reads “in the event the PPP operator needs any further funds then, subject to the provisions of the shareholder agreement such additional funds shall be contributed by the respective shareholders in proportions corresponding to their shareholding of the PPP operator, at the time of the required investment”. Even though this latest clause does not mention anything about a change or about diluting shareholding, it does not specify what happens in the event the Port does not have funds to invest in any additional requirement for future development.


    The case of the forgotten hectares of land

    Perhaps worrying still, is the section of the agreement that refers to the expanse of land within the Port. While there is around 2000 hectares of land, there is reference only to the leasing of 500 hectares for the total payment of Rs 12.1 billion, for 99 years. This amounts to Rs 244,444.44 per hectare, per annum. If this is paid as an annual lease rental, this would amount toRs 494 million for 500 hectares, at Rs 988,000 per annum, per hectare. To be more specific, this would mean that only Rs 2470.00 would be paid per perch.


    The reason why no reference exists to the balance 1500 hectares remains unanswered, and no clauses exist to indicate the procedure for the land to be returned. Would this mean that the Company only pays the lease rental for 500 hectares while enjoying the balance 1500 hectares without any form of fees or rental?


    A comparison of this agreement against the one which was drafted under our government, raises a myriad of questions regarding the gaps and obvious disadvantages in the current agreement toward Sri Lanka as a sovereign entity. Moreover, what about the balance 1500 hectares? Is it perhaps under a separate lease agreement, negotiated away from an unaware public? The difference between a lease rent in USD for 500 hectares, as opposed to 2000 hectares makes a very large difference; a difference that can accelerate national development and economic expansion.


    Lastly, under this current agreement, during first 10 years, China Merchant port is willing to offer 20% of additional shares to Sri Lankan investors. However, when they transfer it after the first six months of signing of the agreement, international valuation of the shares is required. It is important to note at this juncture that regardless of this, the current government has failed to even make a valuation for the overall infrastructure, land, and/or the commercial value of the infrastructure. Pointing to a serious violation of internationally accepted share transferring norms and regulations.


    For a government that prides themselves in maintaining good governance above all else, it is pitiful to note that even the simplest of transparent procedures and protocols are not met. And for a project of such magnitude, that was set to be an overall asset and security to Sri Lanka for years to come, it has dwindled to the position of pointless misconduct. If any credible and data-backed answers can be provided by the government for the questions raised in this article, it is imperative that they are provided transparently and fully, right now. It is the right of Sri Lankan peoples to know the truth behind these negotiations.



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