P.K.Balachandran/The New Indian Express
Colombo, November 5: Sri Lanka’s political folklore, no two countries can be friendlier than China and Sri Lanka. Indeed, for six decades from 1952 to 2014, Sino-Lankan relations could not have been warmer. But in the last two years, the two countries have drifted apart, with hot words being exchanged between Chinese Ambassador Yi Xianliang and the Sri Lankan Finance Minister Ravi Karunanayake recently.
The contentious issues have their roots in the extraordinary influence China enjoyed in Sri Lanka in the second phase of President Mahinda Rajapaksa’s regime, an influence which in the view of the present Sri Lankan government, cast a heavy financial burden on Sri Lanka.
The Mahinda Rajapaksa government, which fought the Tamil militants with Chinese weapons, and got US$ 15.5 billion from China for post war development projects when the West was hounding it for human rights violations, returned Beijing’s favor by allegedly allowing Chinese companies to over invoice the cost of their projects, and taking loans from Chinese banks at very high rates of interest.
But a significant section of the Sri Lankan polity began to ask inconvenient questions about Rajapaksa’s China-funded projects. The post-war anti-Rajapaksa movement, which initially focused on his authoritarianism, nepotism and corruption, grew into an anti-China movement with opposition leaders and the media exposing serious financial flaws in Sino-Sri Lankan deals. Projects worth millions of dollars had been given without competitive bidding.
Matters came to a head when, in the January 8, 2015 Presidential election, Rajapaksa was defeated by the Joint Opposition candidate Maithripala Sirisena and the pro-Sirisena United National Party (UNP) won the July 2015 parliamentary elections.
Among the first post election steps taken by President Sirisena and the UNP chief and Prime Minister Ranil Wickremesinghe, was the suspension of Chinese executed and funded projects. This shook Beijing particularly because the US$ 1.4 billion iconic Colombo Port City project had been inaugurated only a few months earlier by President Xi Jinping.
In its defense, China said that every project was cleared by the concerned Sri Lankan government agencies, the cabinet and parliament. It denied charges of corruption, over invoicing and rapaciousness. It pointed out that going back on international agreements would only give Sri Lanka a bad name among foreign investors.
But Colombo would not budge. Writing in Sunday Times, transport and highways expert, Prof.Amal S.Kumarage of Moratuwa University, said that costs of Chinese funded highway projects were 55 % higher than the global norm. Internationally, the cost should be between US$ 7 million to 10 million per km.But in the case of Chinese projects in Sri Lanka, they were 55 % to 135 % higher, and five to 10 times higher than in India.
Economist and Deputy Foreign Minister, Dr.Harsha de Silva, pointed out that the Outer Circular Highway (OCH) costs US$ 56 million per km. The China-built Kaduwela-Kadawatha section of the OCH costs US$ 43million per km, but the Japanese/ADB funded Kottawa-Kaduwela section had cost a third of it, he pointed out.
The interest on Chinese loans are also higher. Chinese ambassador Yi Xianliang claims that the majority of Chinese loans are at 2 % but the Sri Lankans put it at 6 %. According to Dr.Harsha de Silva, even 2 % is “very high” given the fact that Japanese and ADB loans are available at 0.1% to 1%. The US$ 342.8 million loan for the Kelani bridge was taken from Japan at 0.1 percent. It is to be repaid in 40 years with a 10 year grace period. The US$ 520 million taken from China for the Outer Circular Highway involves an interest of 2% plus 0.25 percent as service charge. For roads in Humbantota, US$ 100 million was taken from China at 3.5 %.
And Interest rates were hiked or brought down without assigning any reason. Initially, the interest on US$ 350 million taken for Humbantota Port Phase I, was 2 %. This was subsequently increased to 6.3%. But for Phase II, when US$ 808 million was taken in installments, the interest varied from 2% to 4%. In the process of renegotiating the interest rates, the Chinese were given exclusive use of four berths in the harbor.
While the government was reexamining the terms, Prime Minister Wickremesinghe made two trips to Beijing to persuade China to convert into equity, the US$ 1.5 billion debt incurred for the non-performing Humbantota harbor, and the US$ 300 million incurred for the non-functioning Mattala airport. Sri Lankan Finance Minister Ravi Karunanayake claimed that China has agreed to take an 80 percent stake. But Chinese Ambassador Yi Xianliang denied it saying talks are still on.
Chinese think tanks have opposed any move to buy into loss making ventures in Sri Lanka, especially when Chinese companies have to work with the inefficient and corrupt Sri Lankan public sector institutions. China might like to continue with the present arrangement as regards Humbantota harbor, wherein, Sri Lanka continues to be indebted to China, while China has exclusive use of four berths. China already has under its control the profitable Colombo South Container terminal.
China is now accusing Sri Lanka of being unprofessional and lackadaisical. Ambassador Yi Xianliang recently lashed out at Karunanayake for his unilateral claim about Humbantota and his contention that China is rapacious. Yi maintains that China charges only 2% interest, while European countries charge 5%. If indeed China is charging 6 % why does Sri Lanka ask for more and more Chinese loans, he asks. Yi charges Sri Lankans of being “ungrateful” to China which has already sunk US$ 15.5 billion in Sri Lanka.
But unfazed, Karunanayake told newsmen: “If China is charging only 2% interest, we will pay only 2%. Isn’t that good for us?”.
According to the Finance Minister, Chinese loans come at 2 to 8 percent interest with the average working out to be “in excess of 5 percent”. He denied that Sri Lanka has gone in for loans from Western countries and is asking for more and more loans from China. Sri Lanka has only renegotiated the terms of the contracts leaving the interest rates unchanged.