“Burgeoning debt trap exacerbated by ‘Dragon-debt trap’
File picture of port city location.
The Ministry of Megapolis and Western Development is extremely surprised and disappointed at the gross inaccuracies contained in the article written by Dr. Palitha Ekanayake under the above heading last week and therefore compelled to exercise its legitimate right to respond with our point of view. It is evident that the writer has failed to understand the fundamental features of the Port City project, the economic benefits of Foreign Direct Investment (FDI) and its positive impact on balance of payments. In addition, the very premise on which his article is based that Colombo Port City will result in a doubling of Government foreign debt is without any merit whatsoever. The first point that needs to be made is the assertion that the Port City agreement was entered into without required consultations and public discussion.
It should be pointed out that the new Supplementary Environmental Impact Assessment (SEIA) study, which contains relevant information regarding national sovereignty, cost-benefit analysis, socio economic, environmental impact and mitigation and financial and commercial aspects of the project was made available to the general public for the statutory 30 working day period by the Department of Coast Conservation (CCD) at 11 locations and on its website. The SEIA was prepared by a team of professionals numbering approximately 25 from the CECB, NARA, Lanka Hydraulics Institute, University of Moratuwa, GSMB Technical Services and CDR of Holland among others, under the supervision of the Ministry of Megapolis. The SEIA was reviewed by a Technical Evaluation Committee of over 30 professionals and by the Advisory Council of the CCD, which comprised six Secretaries of Ministries.
99-year lease
As far as the new Tripartite Agreement signed on August 12 is concerned, this was negotiated over a period of 8 months by a Committee of Secretaries, chaired by the Secretary to the Prime Minister, with the participation of the Attorney General. The new agreement contained 22 significant changes to the original agreement signed in September 2014 and these changes and the entire Tripartite Agreement was reviewed and approved by the Cabinet of Ministers prior to signature. The writer’s concern about “security and peace” is utterly unfounded as the reclamation of the required seabed area has already been gazetted under the Lands Ordinance, thus making the reclaimed land State Land and thus, subject to all the laws of the land. (This is again explained in the SEIA). Moreover, 43 per cent of the reclaimed land is leased to the Project Company (CHEC Port City Colombo ) on a 99-year lease and 57 per cent allocated to the state (UDA) as public and marketable lands.
A serious flaw in the article is the lack of understanding by the author that the US$1.4 billion initial investment in the Colombo Port City Project (CPCP) is a FDI, with secondary investments in real estate development projects (both local and foreign) estimated at over $13 billion over the life of the project. Hence we are puzzled by the writer’s statement (quote): “it is doubtful whether it’s economically possible to implement a project which is 100 times bigger that the Hambantota Port when considering the present financial condition (debt-trap) of the Government”. Firstly, 100 times bigger in terms of what? If the writer is referring to the reclaimed land area, Hambantota Port did not reclaim any land from the sea and it was a public investment project costing $1.3 billion, which was almost entirely borrowed by the GOSL from international sources at commercial interest rates.
If the comparison is financial, is the writer trying to compare a $1.4 billion initial FDI investment in reclamation and associated infrastructure and the subsequent $13 billion secondary investment entirely by the private sector to the $1.3 billion in GOSL debt to construct the Hambantota Port? If so, the anticipated private investment is more than 10 times the loan taken to build Hambantota Port. According to basic economic principles that the author may well be aware of, FDIs do not perpetuate a country’s “debt-trap”. Hence the central theme of Dr. Ekanayake’s article that CPCP will see Sri Lanka’s Government debt doubling does not make any economic sense. It is therefore hard to fathom what the writer means when he says it is doubtful the Government can implement Port City which is “100 times bigger than Hambantota” when considering the debt trap of the Government.
However, it is evident that this convoluted analysis and erroneous conclusion is reached by virtue of the writer hugely overstating the Government expenditure component required under the Tripartite agreement and not understanding what aspects of CPCP is a Cost to the Government versus what components of the project constitutes an Investment. For example, according to the writer, “Port City (CPCP) completion cost is around $30-40 billion including 8 year cost escalations”. However, in actual fact the investment in port city reclamation by the project company (with no liability to the GOSL) is $1.4 billion and subsequent new investments by local and foreign investors in real estate development projects is $13 billion. The author makes a further inaccurate statement (to quote): “the total cost includes land filling around $3-5 billion” when in fact the land fill is actually a FDI of $1.4 billion!! We therefore urge the writer to educate himself on the basic commercial terms of the project.
The author further exposes his lack of understanding of the basics by stating that “the estimated cost for developing Sri Lanka Government owned land would be $15-20 billion”. The GOSL does not have to incur any cost in further developing the land extent allocated to the UDA. The cost of reclamation of land and all internal infrastructure will be an investment by the project company. The UDA will transfer lands allocated to it to third party private sector investors who will pay the UDA market rates. These third party investors will then make investments in these lands. At today’s market value, the UDA owned lands are in fact worth $2.5 billion in future revenues. Therefore, it is perplexing how the author concluded that the development of lands would entail a cost to the Government!
No unfair advantage
The writer then goes on to say “China is able to provide better facilities and structures than Sri Lanka can afford…To even provide basic facilities such as roads water, electricity, telecommunication, gas, waste disposal etc. will cost the Government at least $8-10 billion without structures”.
When all internal infrastructure such as water, electricity, roads, telecommunication, gas, waste disposal etc. is being invested by the project company, the writer has no basis to conclude that “China” will have an unfair advantage since the “Chinese side” will have better infrastructure.
All internal and external infrastructure will provide equal access to third party investors investing in GOSL and project company lands and users of Port City’s public facilities such as parks.
The writer is reminded to NOT take cover on whether or not the Tripartite Agreement was placed before Parliament for being ill-informed about the Port City Project. This is the prerogative of the the Prime Minister or Minister concerned. All what is stated above as a rebuttal is outlined in detail in the SEIA study. To present the polar opposite argument made by the writer, Port City would actually help reduce, rather than exacerbate, the GOSL’s foreign debt situation and balance of payments (BOP) deficit. For example, firstly, the FDI inflow of $1.4 billion over the next 30 months or so will help to reduce the country’s BOP deficit. Secondly, the FDI inflow from leases executed by the GOSL and the project company will be recorded as surpluses in the Capital Account signifying a further reduction in the BOP deficit.
Export of financial services consequent to the proposed Colombo International Financial Centre (CIFC) Law being implemented together with enhanced tourism receipts would improve export earnings and reduce its Current Account deficit and thereby enhancing Sri Lanka’s ability to service foreign debt obligations. This does not cover the multiplier benefits of new entrepreneurs locating at the CIFC and new services sector employment opportunities that will be created in retail complexes, hotels, convention centres, IT companies and medical facilities at Port City.
No manufacturing industry
The author’s assertion that the project company will carve out a preferential deal is further debunked by the fact that the marketing campaign of CPCP is a holistic approach benefitting both the project company and the Government. The project company is expected to incur $ 50 million over time on marketing Sri Lanka as an investment destination and investment opportunities within Port City. It is also myopic for the author to conclude that “many of these high-tech knowledge based work are likely to be filled by foreigners in the absence of proper Tertiary and Vocational Education Training (TVET) education plans”. If the author carefully read the SEIA he would have seen that Port City would NOT accommodate any manufacturing industry and hence the relevance of TVET training is highly questionable.
Secondly, Sri Lanka has highly skilled professionals engaged in the construction, hotel, financial services, retail and IT sectors and it will be these types of businesses that would generate new and higher paying employment opportunities within Port City. With over 300,000 persons employed in the IT industry, which has grown at an annual average rate of 15-20% over the last 15 years, it is absurd for the writer to state that “knowledge based work are likely to be filled by foreigners”! The SEIA report highlights the fact that though the project company will invest in internal infrastructure within Port City, the GOSL would have to incur the cost of utility and road infrastructure up to the periphery of the Port City site.
It is also pointed out in the SEIA that this is similar to an industrial estate where the state will invest in roads and utilities for private investors to locate their factories within the industrial estate and connect to the utilities, or a hotel investor such as Shangri-La being provided with various utility connections at the cost of the state. It is however important to point out that utility capacity will be created by the relevant state agencies on the basis of actual demand for such services and therefore they will obtain a return for the costs incurred and services provided. In the case of road infrastructure, it is envisaged that the higher disposable income of those living and working within Port City will justify the investment in required road and public transport infrastructure to access the Central Business District of Colombo.
Over the life of the project, the GOSL may be required to incur a cost of around $1 billion on such infrastructure with more than half being the cost of road infrastructure. However, investments in the initial years of the project will be a significantly smaller amount and will only be made based on the commercial success of Port City. In other words, the CEB will augment grid capacity only if new buildings are being constructed within Port City to connect to the grid at normal commercial rates, giving the CEB a return on its investment. Also, new road infrastructure such as the already committed elevated highway to the Central Business District of Colombo may be unviable if Colombo’s economy remains static.
However, assuming that the GOSL’s policies result in many investors living, working and patronizing the new developments within Port City, there will be greater disposable income to pay higher tolls and road taxes to justify investments in road infrastructure. Therefore, since proposed infrastructure investments by GOSL will be demand driven, an assertion that this will contribute to exacerbating the country’s foreign debt situation is unfounded. Dr. Ekanayake will note that Hambantota airport was built without proper demand assessment and thus the servicing of the debt incurred has become a burden to the state.
No damage to roads
In conclusion, it is pertinent to point out the following important points:
- There is no basis whatsoever for the writer to conclude that CPCP will see foreign debt doubling to $115 billion from $57 billion in 2016. The writer has not understood that CPCP is an INVESTMENT project with the ONLY investment cost to be borne by the GOSL being infrastructure to the periphery of the site, though this will be done based on demand over the 25 year life of the project. Road infrastructure will be for the use of all citizens who require access to and from Colombo.
- Our analysis concludes that in actual fact CPCP will result in an improvement in the Sri Lanka’s BOP and consequently DECREASE the Government’s external debt service burden as a consequence of receipts of incremental amounts of FDI, service sector exports and tourism receipts.
- The statement by the author that “the government will have to look after the other compensation claims estimated to be Rs 15-20 billion for granite, clay, gravel sand sites, road transport, pollution and other affected people” is completely inaccurate and misleading. The quantum of rock transported to Port City from licensed quarry owners is 35 per cent less than the amount transported by road for the recent South Port Construction and there were no discernible issue relating to damage to roads.
We therefore urge the writer to back-up this and other cost estimates mentioned in his article via authoritative sources rather than conjecture and provide a well researched and logical analysis to substantiate his conclusions.