The Emperor’s New Road: China and the Project of the Century

by Jonathan E. Hillman

  During a tour of Colombo Port, I noticed subtler signs of Chinese influence as well. The port’s equipment tells a story of China’s rise in manufacturing and maritime commerce. The oldest cranes were European made. There was some Japanese and South Korean equipment. But the newest machinery was almost entirely Chinese, and the shipping containers were dominated by Chinese firms. Nearly two-thirds of the world’s top fifty ports have received Chinese investment.20

  Adjacent to the port, Sri Lanka is developing Port City, a financial center on reclaimed land that will eventually be as large as central London, nearly doubling the size of Colombo. Proposals for expansion date back to 2004, but the grand plan that emerged has China’s fingerprints all over it. In 2011, the China Communications Construction Company (CCCC) proposed the project and offered to invest $1.4 billion in financing.21 It will lease two-fifths of the new land for ninety-nine years. The blueprints look like a Dubai-inspired magic trick, creating a mini-metropolis out of nothing. Dredging machines run at all hours, sucking up sand from the ocean floor and coughing it out. Cubic foot by cubic foot of sand, an island is slowly emerging and expanding. It could be a vision taking shape or a bubble expanding toward explosion.

  Port City reflects the perils of unsolicited proposals. Most international donors craft their offers in response to proposals from recipient countries. Public solicitations can result in more offers, stiffer competition, and ultimately better deals for recipients. But for Port City, and several other projects in Sri Lanka, Chinese companies and officials effectively made the proposal. In these cases, China sets the table for discussions and greatly simplifies the process by offering the proposal, financing, and a contractor ready to get started. In the most egregious instances, Chinese firms even complete the feasibility study for the project they were proposing, effectively approving their own work and providing another opportunity to inflate costs.

  From a purely commercial perspective, the best option for improving the trade competitiveness of Sri Lanka’s ports would have been a modest expansion of the Port of Colombo while improving operations there and at other existing ports. But Rajapaksa had bigger ambitions. He wanted to bring economic opportunities to his rural base of support and, in doing so, cement his own legacy.

  The temptation to build transformative projects is universal. Politicians understand that technical and management improvements do not generate the same excitement as ribbon-cutting ceremonies. The scale is further tipped toward building new facilities, rather than upgrading existing ones, because of the lag between project announcement and completion. Successful projects can take years to complete and even longer before they become profitable. Officials who reap the political benefits of starting new projects are rarely around to be held accountable for their long performance.22

  Colombo’s Lotus Tower is another Chinese megaproject with questionable utility. At $100 million, it is South Asia’s second-tallest building and, true to its name, looks like a metallic green stem and red flower. Pitched as a telecommunications hub, it can house up to 120 telecom companies.23 Yet there are only 115 licensed telecommunications operators and radio and television broadcasters in all of Sri Lanka.24 Even if the tower attracts tourists, it seems destined to join the list of vanity projects that have dangerously increased Sri Lanka’s debt.

  To be sure, Chinese financing in Sri Lanka during Rajapaksa’s two terms was not entirely wasteful. Thanks in part to Chinese-built roads, I was able to drive a counterclockwise miniloop of the island over three days, touching the southern and western coasts before returning to Colombo. When highways gave way to rural roads, often when traveling from the coasts into the island, it felt like two different countries. Outside the cities, the coastal highways were smooth, fast, and comparatively safe. Inland, on the rural roads, there was deceleration, vibration, and chaos as trucks and tricars, three-wheeled motor carts, dodged potholes and each other. Near rural town centers, the sides of the roads were bustling with people on the move, children playing, and tiny shops. The roads are where life happens, and everyone seemed inches away from collision.

  But Chinese loans have dangers of their own. In Sri Lanka, China was lending at relatively high rates, for comparatively short periods, and encouraging refinancing and additional borrowing. The first phase of the Hambantota Port project was a $307 million loan at 6.3 percent interest. Unlike these commercial rates, multilateral development banks typically offer loans at rates closer to 2 or 3 percent and sometimes even closer to zero. China gave Sri Lanka fifteen years to pay back the first Hambantota loan, while the ADB had provided a twenty-five-year loan for the Port of Colombo. As delays began to mount, the additional time would have been helpful. And of course, Chinese officials were happy to help Rajapaksa borrow extra and refinance at a higher rate.

  Speed is China’s strongest appeal and its greatest risk. Chinese loans, while often requiring the partner to use Chinese contractors, are often not as stringent in their requirements for safeguards and reforms. In 2011, Sri Lanka’s official external financing strategy singled out the differences between Chinese loans, noting, “Loan processing time for these loans is very short, conditions required to be completed for obtaining these loans are much fewer compared with the other lending agencies.”25 The officials writing that report should have acknowledged the risks that came with a faster loan process, but in the moment, all they saw was upside.

  All That Glistens

  China was not the preferred lender but often Sri Lanka’s last or only resort. There were no competing offers for Hambantota’s port, suggesting that other potential lenders did not see rewards commensurate with the project’s risks. Sri Lankan officials should have interpreted that lack of interest as an important warning. Instead, with the project having been judged too risky by international lenders for a loan with a lower rate, they pushed ahead with loans at higher rates.

  Rajapaksa was so eager to build that some feasibility studies became a box-checking exercise rather than a tool for risk mitigation. The most glaring example is a thirty-minute drive from Hambantota Port. Out of the jungle, past signs warning drivers about wild elephants, a $210 million airport emerges. China Export-Import Bank provided a concessional loan, and China Harbour Engineering Company, the same company behind Hambantota Port, built the facility. The government reportedly spent less than $6,000 on the feasibility study for the airport, ignoring previous work that examined options for a second international airport. At the time, Rajapaksa’s cousin Prasanna Wickramasuriya was chairman of the state agency that operated the airports.26

  The Mattala Rajapaksa International Airport was intended to become a gateway for tourists but has become a destination itself since opening in 2013.27 For less than a dollar, people can visit the airport’s main hall, where a large Buddha statue greets visitors. At the airport’s peak, a handful of airlines used it, including a new state-owned airline called Mihin, the diminutive form of Mahinda. For a brief period of time, it was possible to buy tickets using currency with Rajapaksa’s image on it to fly Mihin to Rajapaksa Airport.28 After landing in Mattala, you could go to the Rajapaksa port, the Rajapaksa cricket stadium, or the Rajapaksa National Tele-Cinema Park.

  As it turned out, not many people wanted to do any of those things. Mihin ceased operations in 2016, and without sufficient demand, even Sri Lanka’s largest national airline stopped operations at Mattala. In 2017, the airport averaged seven passengers a day, and in 2018, the last commercial airline, FlyDubai, announced it was canceling its service. Except for the occasional emergency landing, and a skeleton staff to perform essential tasks, the facility then sat unused.

  While skimping on the airport feasibility study, Rajapaksa spent nearly $800,000 of public money for an opening ceremony for Hambantota Port, on November 18, 2010. It was his sixty-fifth birthday and the last day of his first term in office. Rajapaksa must have consulted his personal astrologer, Sumanadasa Abeygunawardena, who was trusted to select auspicious dates and times for state events. As Raj
apaksa rose, so did Abeygunawardena. His horoscope text-message service expanded thanks to a deal with the state telecom company, and Rajapaksa appointed him to Sri Lanka’s National Savings Bank board despite his complete lack of banking experience.29

  The Hambantota Port opening was an opportunity to celebrate with friends and, naturally, to reward loyalty. The Sri Lankan actor Jackson Anthony emceed the event and collected a $179,000 fee, ostensibly for helping to organize it. Anthony was another good friend, having claimed in 2011 that Rajapaksa was “related to Lord Buddha.”30 More than $80,000 was spent on dancers. “Five years ago . . . I promised the nation that I would bring an honourable peace to this country and also to build a new Sri Lanka. I am glad to state that I was able to fulfill both these promises within five years, even before the end of my term,” Rajapaksa told his audience.31 After his speech, Rajapaksa released water into the port.

  The show hid the fact that the port was not yet functional. A sensationalist press release from the lead Chinese construction firm, China Harbour Engineering Company (CHEC), recounted, “The crowds immediately became excited and many employees of CHEC having participated in the port construction were so excited that they couldn’t hold their tears.” It claimed that CHEC “smoothly managed to make the port accessible by ships four months before the date required by the Owner.”32 In reality, a large rock was obstructing the entrance to the port and still needed to be removed. Rather than risk delaying the opening, CHEC had prematurely flooded the port. It charged $40 million over the next year to remove the rock.33

  As Rajapaksa partied, Sri Lanka’s economy was developing a hangover. Doubts about his investments began to mount as their promised benefits—jobs, rural development, and transformative growth—failed to materialize. His response was to borrow more. In 2012, he secured an additional $757 million loan from China’s Export-Import Bank to further expand Hambantota Port, which was barely attracting traffic. By 2015, Rajapaksa had tripled Sri Lanka’s debt, and roughly 95 percent of Sri Lanka’s government revenue was going toward servicing it.

  Rajapaksa’s spending became a prime target for the opposition party, led by his own health minister, Maithripala Sirisena, who left Rajapaksa’s cabinet to challenge him in the 2015 election. Accusing Rajapaksa of accumulating debts that “generations of our children and grandchildren would be unable to completely finish paying off,” Sirisena made Sri Lanka’s debt a centerpiece of his campaign and promised in his campaign platform to “expose to the country the true state of state loans,” take “urgent steps to lighten the state debt burden,” and “re-assess all mega projects undertaken recently.”34 In a surprise upset, he unseated Rajapaksa in January 2015.

  Sirisena’s administration reexamined some deals and temporarily halted the second phase of construction at Hambantota’s port. Although well intentioned, this also delayed any revenue the port could generate, effectively making it even more difficult to service the loans.

  But the new government’s options were limited, and it learned how large projects, once started, are difficult to kill. Even if cancellation makes economic sense, political and legal barriers stand in the way. Politically, it is always easier to give, announcing a new project, than to cancel and take away. India and some Western partners were willing to provide technical support, but even in aggregate, they could not match China’s financial largess. The administration discovered that existing contracts were difficult to terminate, and many included clauses requiring any disputes to be resolved in Chinese courts. Even despite an election mandate for change, Sirisena had little room to maneuver.

  With Sri Lanka unable to repay its debt, its pound of flesh came due. In July 2017, Chinese and Sri Lankan officials agreed to a concession that granted China Merchants a controlling stake in Hambantota Port and a ninety-nine-year lease for $1.12 billion.35 The agreement sparked protests in Hambantota and accusations of neocolonialism. The project would not be as disappointing if its scope was not stretched and its supposed benefits were not spectacularly exaggerated.36 The windfall of one hundred thousand jobs has not materialized, and in November 2017, over four hundred port employees were let go.37 In December, on the day of the handover, Sri Lankans gathered in front of the port’s main gate to protest. Using an aerial picture of the port, rather than the people on the ground, Xinhua, China’s official news agency, tweeted triumphantly, “Another milestone along path of #BeltandRoad.”38

  “Debt Diplomacy”

  When I visited Hambantota a month after the handover, the signs of China’s growing influence were hard to miss.39 As the sun rose one Saturday morning, groups of Chinese workers in half-zipped blue jumpsuits made their way to the port. One of the few vessels anchored at the port was affiliated with China Shipping. The port’s headquarters, a triangular thirteen-story wedge built by a Chinese contractor, juts out of the flat green landscape like it was copied and pasted from a hotel resort catalogue. Nearby, seventy or so Sri Lan-kans staged a quiet protest. A small group stood behind a booth with signs that asked, “Authorities, what do we get, our job or death?” Most of the protesters were across the street, sitting at tables underneath the shade of trees. A few days earlier, the port’s employees’ union announced that former workers were starting a hunger strike.

  Exactly how the Hambantota agreement came together remains a matter of some speculation, a result of the lack of transparency around it and other financing agreements. Sri Lanka’s parliament approved the revised Hambantota Port deal, but the text has not been made public, allowing suspicions to fester. The Sirisena administration claims that Chinese officials insisted on a Chinese firm taking a controlling stake in the port.40 After leaving office, Rajapaksa claimed that Chinese firms were never intended to have a controlling ownership stake and operational control of the entire port but should have operated an individual terminal, as they do in Colombo.

  As Hambantota’s story has been told and retold, it has become Exhibit A for a growing case against China’s “debt diplomacy,” the term of art for loading up small economies with loans to extract strategic concessions.41

  Without a doubt, lending risks along the BRI are high.42 In 2018, Christine Lagarde, then managing director of the International Monetary Fund, warned in a speech that “the first challenge is ensuring that Belt and Road only travels where it is needed.”43 She mentioned the risk of debt increases but stopped short of saying that China was using this leverage. In truth, the IMF wields the same basic power. Its loans are issued with requirements that recipient states undertake specific reforms.

  The case against Chinese officials’ malpractice is strong. They had the means, motive, and opportunity. China was not Sri Lanka’s leading creditor, but it was willing to accept payment terms that more responsible lenders would not. At the time of the Hambantota deal, China only held 10 percent of Sri Lanka’s foreign debt. In comparison, the World Bank held 11 percent, Japan held 12 percent, and the ADB held 14 percent.44 Not all lenders behaved the same, however. For example, the ADB has three major financing guidelines: it seldom takes an equity stake larger than 25 percent of total share capital, it will seldom be the largest single investor in an enterprise, and it will not assume responsibility for managing an enterprise. In the case of Hambantota Port, China took an 80 percent share, became the largest investor, and assumed responsibility for managing the enterprise.45

  China’s motive is allegedly strategic, and Beijing’s behavior leaves cause for concern. During 2014, two Chinese submarines and a warship docked at Colombo, Sri Lanka’s capital, setting off alarms about China’s expanding military footprint. In recent years, Chinese officials and defense experts have started to speak more openly about using Chinese-funded ports in the Indian Ocean with questionable commercial merits, including Gwadar Port in Pakistan, for peacekeeping and disaster-relief operations.46

  But the port is not yet a Chinese naval facility, and Sri Lankan officials have tried to calm fears that it will become one. “Sri Lanka headed by President Maithripala
Sirisena does not enter into military alliances with any country or make our bases available to foreign countries,” Prime Minister Ranil Wickremesinghe promised in August 2017.47 Early the following year, Sri Lanka’s highest-ranking military officer said, “There had been this widespread claim about the port being earmarked to be used as a military base. . . . No action, whatsoever will be taken in our harbor or in our waters that jeopardizes India’s security concerns.”48 In mid-2018, Sri Lanka announced that it was moving the southern command of its navy to Hambantota, underscoring its intent to control the port. Since then, U.S. Navy and Japanese Maritime Self-Defense Force ships have made port calls to Hambantota.49

  In military terms, Hambantota could be useful for Beijing, but it is not a game changer. The port’s operations are still overseen by Sri Lankan authorities, and any visiting military vessels need their approval.50 That could change in the future, of course, and a country heavily indebted to China will be less likely to refuse requests to host Chinese military vessels. If China did gain unfettered access, the port’s location is a double-edged sword. It is located close to a major shipping lane, which is strategically valuable, but dangerously close to one of China’s major competitors, India, whose military is moments away.

  Without a doubt, China’s irresponsibility helped create Hambantota Port. Sri Lanka’s overall debt levels were unsustainable, and it was looking for relief. China contributed significantly to that problem because of the speed at which it lent. Between 2008 and 2017, the beginning of its renegotiations over Hambantota Port, China lent $8 billion as other lenders were calling for caution.51 Chinese officials claim that other foreign creditors deserve their share of the blame. But pointing to shares of foreign debt is like saying debt is debt, regardless of where it comes from and how it is used. That would be true if China adhered to the same standards and safeguards as Western lenders do. It did not and should bear more responsibility.