Posted on August 31, 2021
If Chinese loans were cigarettes, Sri Lanka’s Hambantota Port would be the cancerous lung on the warning label. Some observers have pointed to the underperforming port and alleged that China is using “debt trap diplomacy,” loading countries up with loans and seizing strategic assets after they cannot repay. Others have argued that Sri Lanka, not China, is responsible for its debt woes. The debate is important for understanding the risks lurking in China’s Belt and Road Initiative, especially as the pandemic pushes more of China’s borrowers to the brink.
Declassified documents tell a more complex story: a port that was conceived as far back as 1910, a Canadian firm that began chasing the project in 1999, and a Sri Lankan government that wisely passed on the project in 2003. This history, largely overlooked and its full details previously undisclosed, helps explain the catastrophe that followed. What gave birth to Hambantota Port was the destructive marriage between two rising forces: Mahinda Rajapaksa’s ascent in Sri Lankan politics and China becoming the world’s largest bilateral lender.
Imperial Echoes
I began investigating Hambantota’s origins while writing The Emperor’s New Road. In early 2017, I toured Colombo’s bustling port. From the port’s control tower, I could see cranes offloading containers from massive cargo ships.
The flurry of activity was expected, as Colombo ranks among the top 25 busiest container ports in the world. What was striking, however, were the pockets of unused space. The thriving port still had room to expand. As I’d later learn, the biggest threat to Hambantota Port’s future has always been Colombo Port’s success.
The next day, I drove south to sleepy Hambantota and arrived just weeks after it had been handed over to China Merchant Port Holdings, a Chinese state-owned enterprise.
I wanted to understand the area before China arrived. Most of the world had never heard of Hambantota before China built a massive and underused port. But China is hardly the first great power to pursue large projects beyond its borders, nor is its Belt and Road the first vision for improving global connectivity. In Sri Lanka, Pakistan, Djibouti, and other Belt and Road hotspots, China is following in the footsteps of its imperial predecessors, and in more recent history, the national and multilateral development agencies they created after suffering financial and reputational losses. In many cases, China is repeating their mistakes.
In fact, the first feasibility study for Hambantota Port was not done by China, but by Canada. When the study was delivered to the Sri Lankan government in 2003, local media reported that it did not meet the government’s needs for a “bankable study.” Until now, however, few details of the study have been made public.
The Canadian government provided a copy in response to an Access to Information Act request. That difference is itself worth underscoring. As far as the Chinese government is concerned, public access to information is an oxymoron, and it rarely discloses project details. This preference for opacity is a feature, not a flaw, of the Belt and Road.
But there are also similarities in how Canada and China approached the project. Like Chinese authorities often do, the Canadian government was responding to a request from one of its largest construction companies. The Montreal-based SNC Lavalin discovered the project through a Sri Lankan émigré and owner of InfoConsult, an IT services business in Toronto. SNC Lavalin later carved out a considerable role for the company, writing “InfoCnsult [sic] will provide expertise in IT, computer software and hardware, as well as local logistics and coordination. It will also participate in the economic analysis task.” It is doubtful that an IT services company could add much value to the economic analysis of a port.
So, whose idea was the port? SNC Lavalin submitted an unsolicited proposal to the Sri Lankan government in 1999 and later won support from the Canadian government to subsidize its study, but the port was hardly a Canadian invention. Previously, the idea was traced back to Mahinda Rajapaksa’s father, who represented the Hambantota district in parliament for nearly two decades until 1965. In its application to the Canadian government, SNC Lavalin cited a 1952 World Bank study as the first to recommend developing a major seaport on Sri Lanka’s southern coast.
But SNC Lavalin discovered an even longer history while it was holding public consultations as part of the study. (This is another difference worth noting, as China Harbour Engineering Company, the eventual contractor for the port, does not appear to have pursued a comparable set of community engagements.) During one meeting with community leaders, the mayor of Hambantota Town said that Leonard Woolf, a British administrator who later become a novelist, proposed the idea in 1910. In other words, China now operates a port once coveted by imperial Britain.
“A Unique Opportunity”
Of course, where the idea for the port came from is far less important than how it moved from intriguing concept to wasteful reality. Ideas for megaprojects can span decades or even centuries before they are taken up. The Suez Canal, for example, was initially studied and abandoned by a succession of leaders from Egypt’s pharaohs to Napoleon. What makes these projects come into being is new technology, economic necessity, political opportunity, or often a confluence of these forces. The idea is the easy part.
Feasibility studies often bridge the gap between idea and execution, and they are as much art as science. When the company doing the study also wants to build the project, as is often the case with Chinese state-owned enterprises along the Belt and Road, the incentives can be stacked toward picking overoptimistic assumptions. The temptation to recast disadvantages as advantages is heightened when projects are being done in underdeveloped areas like Hambantota. The absence of roads, railways, and supporting infrastructure in-land is normally a major weakness for a port proposal. But when development is the goal, the port becomes a catalyst to deliver what is missing.
At the heart of the SNC Lavalin study are some optimistic assumptions and artful phrases that turn the project’s weaknesses into opportunities. As required by the Canadian government, the SNC Lavalin study put more emphasis on exploring the project’s environmental and social impacts than China’s state-owned firms have often done along the BRI. After detailing these risks, however, the study asserts, “There is a unique opportunity for the [Government of Sri Lanka], the local community, and international partners, to codesign a harbour development project which embraces a social and economic inclusion framework and philosophy.” In other words, the absence of these practices was artfully recast as a justification for the project. With this magical thinking, risks become rewards.
The study turned Hambantota’s connectivity problem into a call to action. It acknowledged that Sri Lanka’s roadways radiate from Colombo and that Hambantota was poorly connected with the rest of the country. But the study noted, “a unique opportunity exists to connect Hambantota to the Country’s expressway network by extending the new Colombo to Matara highway another 77 km to Hambantota.” China would later finance and build that very extension, strengthening a critical link to the port and winning more business for its state-owned enterprises in the process.
The economic analysis was admirably transparent about its assumptions, but those assumptions were dangerously optimistic. In all the options the study examined, further expansion at Colombo Port was postponed. While that outcome was theoretically possible, the study did not explain why it was the most likely outcome, or even a likely outcome. In fact, in March 2003, two months before the study was completed, Sri Lanka’s port authority announced it was moving ahead with a container terminal expansion at Colombo Port. Even with these unrealistic assumptions, only one of nine scenarios that were modeled generated “reasonable” private and public sector returns on investment and that scenario assumed high traffic growth.
To its credit, the study was open about its limitations. “The results from the model should be carefully weighed when proceeding into the next phase of the study,” it cautioned. “A prudent interpretation of the present model results is that we have good ground to continue looking positively at the project viability.” It also cited five types of risk that could impact the project: traffic/revenue, construction cost, operational, political, and financial. And it acknowledged a key risk that it had tried to assume away: “shipping lines will be reluctant to locate in Hambantota, particularly if the South Harbour development [in Colombo] goes ahead in parallel with Hambantota.”
Wisely, the Sri Lankan government passed on the project. Officially, Sri Lankan officials rejected the study on the grounds that it was not detailed enough. Its MOU with SNC Lavalin called for a more detailed “bankable” study. It its contract with the Canadian government, however, SNC Lavalin agreed to divide the study into two phases, with the “bankable” study to follow the initial feasibility study. The Canadian government wanted Sri Lanka to indicate whether it was serious about the port proposal, and if so, which option should be studied in greater detail. In reality, the Sri Lankan government was not interested enough to proceed.
Two Shocks
In 2003, behind this technical debate was a potent political reality: Hambantota Port did not have sufficiently powerful patrons. Sri Lanka’s Ministry of Southern Development naturally supported the project, given that it would bring investment to an area under its purview. But the Sri Lankan Port Authority wanted to expand the existing port at Colombo. The Canadian government was aware that regional politics and commercial logic were at odds. “Only one container seaport is needed in Sri Lanka,” an internal summary noted at the end of the study in December 2003. The Sri Lankan government passed on the project, and the Canadian government declined to fund further study of it. The system worked.
But two shocks transformed that system. The first was China’s rise as a bilateral lender. The study’s section on potential financing arrangements describes an international landscape that now feels ancient. The World Bank and Asian Development Bank are mentioned as potential sponsors, as is Japan’s Bank for International Cooperation, but China is not mentioned at all. “Several [Export Credit Agencies] are open for lending to the public sector of Sri Lanka,” the study notes, “but the amounts that they are prepared to lend are generally small and the terms and conditions (including the repayment terms) offered are much less favourable.”
China has changed all of that, and its rise is challenging existing lenders and countries courting investment alike. China is now the world’s largest official foreign creditor—overtaking the World Bank, the IMF, or all OECD creditor governments combined. Export credits have become a powerful tool in Beijing’s economic arsenal. In 2007, the Export-Import Bank of China provided its first loan for Hambantota Port. From 2015 to 2019, China’s official export credit activity equaled 90 percent of that provided by all other G7 countries combined.
Chinese officials downplay this scale when rebutting the debt trap narrative. They point out that when the port was handed over, China held less of Sri Lanka’s debt than did the World Bank, Asian Development Bank (ADB), and Japan. But as a recent ground-breaking study makes clear, China does not follow the same rules as other leading lenders. As the authors summarize, “First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies.”
There are also differences in how China conceives and executes projects. The SNC Lavalin study, overseen by the Canadian government, aimed to identify and mitigate environmental and social risks before the project started. In contrast, China moved faster, pushing some risks further into the project development and ignoring others entirely. Even though Colombo Port was already being expanded, including with Chinese investment, Chinese officials gave the greenlight to a second container port. At every step, there was little transparency.
The second shock that made Hambantota possible was Mahinda Rajapaksa, who rose to the top of Sri Lankan politics and exploited China’s riskier approach to projects. Hambantota Port was only one of several dubious projects that Rajapaksa pursued, many of them named after himself, located in his home base of support, and financed by China. As The Emperor’s New Road recounts, Rajapaksa’s priorities were clear. He spent less than $6,000 on a feasibility study for what became the world’s emptiest airport, but more than $80,000 on a ceremony with dancers and singers to prematurely open Hambantota Port on his birthday.
More than a decade has passed since that ceremony, and Hambantota is still struggling in the shadow of its successful sibling in the north. The port’s operating group occasionally releases statements intended to underscore the port’s progress and increasing performance. But there are no readily available, consistent, and reliable statistics for economic activity at Hambantota. A very rough proxy for port activity, in lieu of better data, are port calls. As illustrated below, the difference is dramatic.
Learning from the Past
As the United States and its allies work to expand the availability of alternatives to China’s Belt and Road, this fuller history of Hambantota Port offers at least three lessons.
First, a little technical assistance can go a long way—when properly applied. The first feasibility study for Hambantota Port, while reflecting greater attention to environmental and social impacts, had unrealistic economic assumptions. The Canadian government essentially paid a Canadian contractor to examine the feasibility of a project that contractor wanted to pursue. Clearly, the Sri Lankan government would have been better served by an independent assessment. It is encouraging to see Congress including technical assistance in the Strategic Competition Act and the EAGLE Act, among other legislation.
Second, transparency is ultimately the best defense against bad deals. The scrutiny that greater transparency enables makes it less likely that bad projects will get the green light and that citizens can hold officials accountable. The agreement for Hambantota Port still has not been made public, fueling speculation and giving rise to conspiracy theories. In Sri Lanka and beyond, China could help itself in the long run, avoiding financial and reputational losses, by increasing the transparency of its lending today. But unfortunately, there is little reason to expect that China will make the Belt and Road a “sunshine initiative,” as Chinese officials have called it, anytime soon.
A more promising path is for borrowing countries to embrace greater transparency. Of course, they face real political obstacles. As Anna Gelpern and her co-authors recommend, countries could help themselves by adopting laws that require disclosing all debt contracts, as Cameroon did for a period. Greater transparency can also have the added benefit of strengthening developing countries at the negotiating table. China’s Belt and Road is a sea of bilateral deals, a process that is designed to keep its various partners siloed and competing for Beijing’s attention and resources. Developing countries could also find ways of sharing more of this information with each other.
Finally, it is impossible to prevent every bad project. Providing technical assistance and encouraging transparency are important steps, as is mobilizing more financing for sound projects. But when unchecked domestic political ambition converges with irresponsible foreign lending, bad projects are born. Mahinda Rajapaksa’s recklessness may seem unique, but it stems from a challenge that is common globally. Leaders love to announce new projects, savoring the spotlight and making grand promises. Many are not around to be held accountable when those promises are not delivered, or they effectively use patronage networks to shield themselves.
There is no magic fix for the moral hazard running along China’s Belt and Road. India has considered scooping up the failed airport near Hambantota, also financed by China and named after Mahinda Rajapaksa. Further afield, in the Western Balkans, the European Union is assisting Montenegro, which agreed to a Chinese-financed and built highway project that costs roughly one fifth of its GDP. The herd of white elephant projects is likely to grow as countries struggle with the pandemic’s financial aftershocks.
After a fleeting separation, Sri Lankan leaders and Chinese lenders have reunited and appear poised to repeat their earlier mistakes. Despite running the country’s finances into the ground, Mahinda Rajapaksa has returned to power, blaming his predecessors and making new promises. Sri Lanka’s debt appears unsustainable, but China is moving ahead with costly projects of questionable utility and without transparency, including the Colombo “Port City” project. Warnings abound as observers caution against “the next Hambantota” in Africa, Southeast Asia, or even Europe. But tragically, the next big mistake is materializing in Sri Lanka’s capital.
