Ports Ministry outlines negative features of Hambantota project

The conclusion of a deal with a Chinese company to develop the Hambantota Port began in May last year after a visit to Beijing by Prime Minister Ranil Wickremesinghe, according to the detailed Cabinet memorandum prepared by the Ministry of Ports and Shipping.

The memorandum is backed by several documents as annexures. They include minutes of meetings, other cabinet documentation, reports and related issues.The first move came in May last year. Premier Wickremesinghe told a meeting of the Cabinet Committee on Economic Matters (CCEM) that many Chinese investors were interested in the Hambantota Port and industrial parks. In the same month, the Sri Lanka Ports Authority (SLPA) submitted details of debts and obligation. The loan (obtained by the Rajapaksa administration) was being paid by the SLPA and not the Treasury. CCEM, however, decided that the Chinese Government should undertake a study of the port on a public-private partnership basis and submit a proposal.In July, the Chinese Ambassador Yi Xianliang appeared before a meeting of the CCEM. Responding to a Government request, he declared that under the existing Chinese law it was not possible to convert debt directly into equity and it needs to be executed through discussions with investors on commercial terms.

In August 2016 the CCEM gave instructions to R. Paskaralingam, Advisor to Ministry of National Policies and Economic Affairs (which is under Premier Wickremesinghe) to submit a paper on the strategy on which Chinese debt to equity could be transferred.

In September last year, the CCEM was told that the Chinese Ambassador had recommended two companies – China Merchants Ports Holding Ltd. and China Harbours Engineering Company Ltd. A Committee of Ministry Secretaries examined the matter. Later, Paskaralingam was asked to assist the Cabinet Appointed Negotiation Committee (CANC) and “give them relevant guidelines.” Thus, there were no invitations for other bidders or requests for proposals made.

The China Merchants Ports Holding Ltd. was selected. The SLPA said it was not consulted about the decision. The Ports and Shipping Ministry charged that the Board of Directors of the SLPA was surprised that “the Committee has considered only the upfront money and all other aspects of the project have been ignored.”

At a meeting of the CCEM in November last year, the SLPA had proposed a share allocation for 65% (for the Chinese company) and 35% for the SLPA.

However, negotiations had been based on share allocation of 80% for the Chinese firm and 20% for the SLPA. It had been approved by the CCEM and endorsed by the Cabinet of Ministers.

It was explained at the same meeting that the Chinese side has agreed to accept a transaction sum not exceeding US$ 1.4 billion and to ascertain the transaction value, pursuant to financial and due diligence. Only the transaction value has been considered and the total value of the facility has been disregarded, which is much higher. The SLPA had already paid US$ 220 million approximately as loan repayment and this has been ignored when calculating the transaction.

In October last year, the Minister of Ports and Shipping told the cabinet that construction costs of major projects of Hambantota Port alone exceeded US$ 1.4 billion and this cost had to be borne by SLPA through loans and their own funds. The SLPA had also floated Request for Proposals (RFP) for various ventures at the Hambantota Port including bunkering facility. The RFP process “was kept on hold as per decision taken at the CCEM meeting in July last year.

In December last year “a joint Cabinet Paper on Development of Hambantota Port was submitted by Minister of Development Strategies and International Trade, Minister of Special Assignments and the Minister of Ports and Shipping.” However, the Ports and Shipping Ministry “was not aware of the submission until the Cabinet paper was submitted.”

The Framework Agreement was signed between the China Merchants Ports Holdings Ltd, a Chinese project proponent and a committee comprising Ministry Secretaries. At a CCEM meeting in December last year, approval was granted by them for the Framework Agreement. Accordingly, the Cabinet of Ministers endorsed the decision.

Dealing with the “Concession Agreement, sequence of events” the cabinet memorandum notes that a second draft was to be scrutinised by the Attorney General.” It notes, “On reviewing this document, it was observed that the latter document contains more unfavourable conditions than that of the first document – e.g. including the condition that that the public-private partnership operator or any of their nominees shall be permitted to exclusively carry out Port/terminal development activity within 50 kilometres from the centre of the Hambantota Port during the entire lease period.

“Further, at the CCEM meeting on March 1, 2017, approval was given to authorise the Secretary of the Ministry of Finance to establish a Special Purpose Company within the Treasury for the development and operation of the Hambantota Port holding 100 % shares and acting as the custodian for the Port Operations Company and to give authority to manage and facilitate all required Government approvals as a National Priority and on a fast track basis.”

The Ports and Shipping Ministry has noted that that the investment value of the share equity of the Chinese company does not include upfront payment of the lease rental for the land area of the Port property. Anyhow the Port Property and the Lease Area definition stated in the Concession Agreement need to be changed defining the same clearly. Therefore, the entire land identified in the Port property shall be considered as Lease Area and the public-private partnership operator shall pay fixed lease rental for same throughout the term.  It is to be noted that the investment value proposed by the Chinese company is to be treated as consideration only for cost of development and granting of operational rights.

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