Passive investor to partner in crime: How China lost the plot in Sri Lanka

Bandara Chaminda's enthusiasm is almost infectious.

The sprightly 30-something engineer at Hambantota port reels off the benefits of this port-industrial complex on the southeastern tip of Sri Lanka about 240km from the capital Colombo. "There's massive demand for transshipment of vehicles and it's increasing by the day. Once companies set up their production lines here, we'll get much more ships," gushes Chaminda as he gives a tour of the port.

Hambantota could use more ships, there are none in sight. The port, which started operations in 2010 and was supposed to challenge Singapore, received all of six ships in 2011 and 18 in 2012. The government finally had to ask ships carrying vehicles to offload their wares in Hambantota rather than Colombo.

Naturally, not many share Chaminda's optimism, least of all his boss. Back in Colombo, Sri Lanka Ports Authority chairman Lakdas Panagoda makes little effort to hide his contempt for it. Unfolding a map of Sri Lanka on his desk, he points out two existing ports that could have done the job. "Trincomalee and Galle are natural harbours; there was no need to build a new port."

The only other people who seem to have kept their faith in Hambantota are the Chinese. China Exim Bank funded 85 per cent of the US$361 million for the first phase of the port project that China Harbour Engineering Company and Sinohydro Corp executed. The US$808 million second phase is being built by China Communications Construction Company (CCCC) and China Merchants Group.

Hambantota port is among the many infrastructure projects bankrolled by China since the three-decade civil war between Colombo and Tamil rebels ended in 2009. Many of these are being reviewed by the new government of Maithripala Sirisena that sees them as corruption-ridden relics of the previous regime.

South Asia's tropical paradise is estimated to have received up to US$5 billion from China in the form of aid, soft loans and grants in the past five years. Nearly 70 per cent of infrastructure projects have been funded by China and built by Chinese companies.

"People would want a peace dividend after the war. President Mahinda Rajapaksa looked to infrastructure development to deliver. But in the wake of the financial crisis, our traditional donors in the West were not in a position to help. Only China was," says Saman Kelegama, executive director of the Institute of Policy Studies of Sri Lanka.

Traditional investors also stayed away because of Rajapaksa's refusal to cooperate with probes into allegations of atrocities in the war on Tamil militants. That left the field open for China, but also proved to be its bane. The more it spent, the more it became identified with Rajapaksa's alleged graft-tainted white elephants and misrule.

Not far from Magampura Mahinda Rajapaksa Port, as the Hambantota port is called, is another signature vanity project funded by Exim Bank of China - Mattala Rajapaksa International Airport. Built at a cost of US$209 million, there is hardly a soul around as no airline uses it today.

Soon after the elections, Sri Lanka's national airline suspended its flights here, relieved it would not have to use the airport to keep the president happy. That, it said, would save it US$18 million a year.

And yet another gruelling drive away in the same Hambantota district - which happens to be Rajapaksa's family constituency and is represented in parliament by his son Namal - is the impressive Mahinda Rajapaksa International Cricket Stadium. Bang in the middle of nowhere, the authorities have to dole out free tickets and organise pick-ups and drop-offs for farmers in nearby villages to fill it up on the rare occasion it hosts a match. The nearest towns are hours away.

It is easy to see why Rajapaksa's grand projects came under opposition fire.

"Ports, highways, stadiums, airports, theatres … Rajapaksa wanted conspicuous symbols of his achievement. They also served China well as it wanted to showcase its presence in Sri Lanka," says Kelegama.

But it is the less visible aspects of these projects that dragged China into the vortex of Sri Lankan politics. As allegations began to fly on the lack of transparency in these projects, the money spent on them, their utility, the terms of loans and their crushing effect on government debt, China was caught in the crossfire.

"There was no published record of the interest rates these loans were coming for. It was all a mystery," Kelegama says.

In September 2013, the then minister of ports and highways told parliament that the interest rate for the loan to build the Mattala airport had been increased from 1.3 per cent to 6.3 per cent. No reasons were offered.

The conditions attached to the loans were also at times unclear. When the agreement for the second phase of the Hambantota project was signed during President Xi Jinping's visit to Sri Lanka in September, the ports authority made a surprise announcement that China Merchants Holdings International and CCCC had been granted operating rights to four berths at the port.

Local media speculated the Chinese extracted the berths in return for easing the terms of the existing loans for the port as they had become difficult to service.

Unclear terms have also led to questions over controlling and usage rights, most famously in the stalled US$1.4 billion Colombo Port City real estate reclamation project. The agreement to allow the participating Chinese company to keep 108 hectares of the reclaimed land raised the opposition's hackles over Sri Lanka's sovereignty rights on its land.

There were other niggling issues with Chinese investments.

"Chinese loans were also coming with Chinese workers, so not that many jobs were created either," says Kelegama.

In 2013, the government said over 26,000 work visas had been issued to Chinese nationals in the preceding seven years. But since companies also bring in Chinese workers on tourist visas, the exact number is anybody's guess.

Quality of Chinese projects has also been a sore point, such as a US$1.35 billion breakdown-prone power station in Norochcholai, funded by loans from the China Exim Bank, and designed and built by China Machinery Engineering Corp.

"There's been zero technology transfer with Chinese investments. Every time there is a breakdown at Norochcholai, we have to get engineers from China. Local engineers can't fix it because even the instruction manual for equipment and machinery is in Chinese," Kelegama says.

But the main political opposition to Chinese projects revolved around unfair terms between unequal partners over unnecessary and over inflated projects, with China portrayed as a neo-colonial power propping up a brutal and corrupt regime.

In a thinly veiled reference to China, Sirisena's election manifesto read: "The land that the White Man took over by means of military strength is now being obtained by foreigners by paying ransom to a handful of persons."

Disenchantment was rising among the Tamils, the Muslims and the evangelicals, threatened by Rajapaksa's Sinhala Buddhist nationalist cadre base. The intelligentsia, including journalists, complained of repression. Discontent over corruption spread while politicisation of the judiciary and the police force began to affect law and order.

With one brother as the finance minister, another in charge of defence and his extended family and friends placed in strategic positions across the government, Rajapaksa's control on the country was complete. And because of its financial backing, China's control over him looked just as total.

"A perception began to grow here that China was in fact using corruption as a controlling device," says political scientist and constitutional expert Jayadeva Uyangoda.

"For the first time, China became a domestic political issue in Sri Lanka as people began to view Chinese assistance to Rajapaksa as a means of buying his support by helping him increase his grip on the country."

But while the opposition to Rajapaksa - and by extension China - grew, Beijing seemed oblivious of the sands shifting beneath its feet. Neither did it seem to realise that it was now viewed as an active partner in crime rather than a passive investor.

Its over-reliance on Rajapaksa meant it had no channels of communication with competing political forces and other stakeholders typical of a multiparty democracy. When the South China Morning Post asked Finance Minister Ravi Karunanayake if the Chinese were in touch with him when he was in the opposition, he says: "No, they probably thought Rajapaksa would rule forever."

R Sampanthan, leader of the Tamil National Alliance, the third largest party, sounds similarly underwhelmed: "They seem to hear what we say but it's difficult to tell if they act on it."

Ironically, it could have been China's policy of non-interference that blindsided it to Rajapaksa's changing fortunes, and its own.

"Chinese missions are not good at reading the general mood. The non-interference policy, which makes establishing a friendly relationship with the incumbent government the dominant goal of the local mission, is part of the reason," says Zhou Hang, co-author of Protecting China's Overseas Interests: The slow shift away from non-interference, a policy paper from the Stockholm International Peace Research Institute (Sipri).

Xi's Sri Lanka trip in September, the first by a Chinese president in 28 years, was a measure of this disconnect. A politically savvier mission would have seen the change coming in four months and advised against the visit.

"There is growing debate within academic and policy circles in China on whether it should more proactively engage opposition parties abroad," Zhou says. But Zhou takes heart from the case of former Zambian president Michael Sata. A China basher while in opposition, Sata's first official appointment was with China's ambassador once he was elected to power in 2011.

"The China card will be played more and more as it becomes a global player. But pragmatism would probably still prevail, especially in countries that receive large amounts of Chinese investment," he said.