U.S. Targets China’s Belt and Road with $553M Sri Lanka Port Investment

ON 11/09/2023 AT 03 : 30 AM

The U.S. is loaning Sri Lanka $553 million to construct a new shipping container deepwater port, as a counterbalance to billions of dollars already loaned by China to the small Asian nation. Is this sound geopolitical strategy or another case of too little, too late?
The Colombo West Internatinoal Terminal deepwater container terminal to be built in Sri Lanka.
Officials and project personnel look out across the site where the new Colombo West International Terminal will be constructed by Adani Corporation, with funds from the U.S. International Development Finance Corporation (DFC). U.S. Embassy of Sri Lanka

The new Colombo West International Terminal will be constructed along the busiest shipping waterway in the world.

According to official records, over half of all global shipping container traffic and more than 60,000 cargo ships which transport roughly two-thirds of the world’s oil pass through these shipping lanes every year. This works out to, by one estimate, roughly 10% of all the world’s seaborne cargo traffic.

The port of Colombo, located in Sri Lanka’s capital city, is one of the best places in the world to invest in everything from new maritime offloading terminals, regional global transport logistics hubs, and free trade economic zone developments.

It therefore makes sense that the United States would be interested in investing in the construction and setting up for operation of a new, modern deepwater shipping container facility capable of handling ships with deep drafts while ensuring efficient loading and unloading and servicing of the vessels while in port. The new facility, which will begin construction shortly, will when completed be 1.4 kilometers (0.16 miles) long and one of the deepest shipping container docks in the world, with a 20-meter (66 feet) capacity. It will have an annual loading/unloading capacity of 3.2 million shipping containers.

The construction project will be carried out and managed by the Adani Group, a major contractor and project management enterprise based in India. Funding will be provided by the U.S.  International Development Finance Corporation (DFC).

To put what this will mean to Colombo, Sri Lanka, and the many shipping vessels which pass through the channel nearby, the Port of Colombo currently handles 7 million TEUs (twenty-foot equivalent units) of shipping containers per year. The new U.S.-funded deepwater terminal will therefore increase that capacity by 50%.

The money for the project comes from a plan concocted by the Biden regime and announced in June 2022 which would invest $600 billion in new infrastructure projects designed to counter the expanding presence of port, airport, railroad, and communications construction efforts being across Asia, Europe, and into Latin America by China. The plan called for the United States to put up $200 billion of the funding and other members of the G7 (minus China) group of nations putting up the remaining $400 billion.

Is the Colombo West International Terminal a good thing for Sri Lanka and the United States? The answer is complicated.

From a pure numbers perspective, increasing the Port of Colombo’s shipping capacity is much needed. Whether the timing is right is a valid concern, considering that companies like the Danish maritime cargo giant Maersk just announced a drastic drop in revenues for Q3 2023, due of sea shipping overcapacity throughout the world. But just because of its geographic situation, Colombo would also bounce back quickly after a year or so of international recession. Since that is roughly the period in which the new shipping terminal would be under construction, launching the project at this time is about as timely as it could be, just from sheer capacity and business timing.

The design of the new terminal, which includes new logistics handling capabilities and a far deeper ship draft than the existing port facilities, could also draw part of Colombo’s existing shipping market away from the other ports, in addition to providing a capability the existing ones cannot handle on their own. This is because the current Port of Colombo’s three existing container terminals have far less capacity than the new U.S.-funded terminal will provide. Those include the Jaya Container Terminal (JCT), with a depth of 12 to 15 meters; the South Asia Gateway Terminals structure, with between 12 and 15 meters; and the Colombo International Container Terminals (CICT) area, with a maximum recommended ship depth of 18 meters under the surface.

From a pure business perspective, on the other hand, this is probably the worst time ever to invest any new money in Sri Lanka. The country is effectively bankrupt, with money previously loaned by China a principal contributor to that condition.

Thanks to predatory lending by China and its state-owned construction affiliate enterprises, Sri Lanka is already on its way to being the host country for some of the most elaborate infrastructure projects which it has ceded control of already to China.

Among those initiatives are:

The creation of the Colombo International Finance City, also known as the Colombo Port City initiative. This is a real estate development built on 665 acres of reclaimed land adjacent to the main Port of Colombo. The project, which when launched was celebrated as a means of “shak[ing] up Sri Lanka’s economic and political landscape”, provides for building a new coastal mini-metropolis along the oceanfront, with a focus on becoming the new regional financial hub in this part of the world, as well as becoming a major commercial center. It will eventually encompass a range of luxury shopping facilities, apartments, restaurants, hotels, a yacht marina and exhibition center. The planners for the project believe it will provide for 143,000 new jobs and $13.8 billion of incremental revenue for the Sri Lankan economy, once it is fully occupied and businesses are running at a normal rate.

The project was funded by a locally structured investment group known as CHEC Port City Colombo Ltd., which is owned by majority state-owned China Communications Construction Company (CCCC) based in Beijing. That enterprise provided an initial investment of $1.3 billion but which has been climbing for years since work began, with loans backed by Sri Lanka that it began to default upon over six years ago.

The new City is now firmly under the control of China and is expected to become something like a Chinese Dubai that doesn't pay any taxes to Sri Lanka for at least decades. 

The Hambantota Port project. This $1.5 billion shipping seaport was built just south of Colombo, in Rajapaksa’s home town district, was financed with funds from the Export-Import Bank of China (EXIM). After the government proved unable to make the payments on the loan associated with this project, it signed off on a unique concessionary agreement with Chinese state-owned China Merchants Port Holdings Co., Ltd. (CMPort). Under the terms of that agreement, it gave away 70% of the Hambantota Port to CMPort (and, effectively, to China), while also signing an additional development contract with CMPort for further work to expand this port further. That additional contract is valued at $1.1 billion and represents another debt Sri Lanka is not expected to be able to pay.

Sri Lanka also defaulted on loan payments for this development some years ago, the government’s inability to make those payments forced it to grant CCCC – and effectively the country of China – with a lease on land in the Hambantota port district for a period of 99 years. All by design. 

The ceding of control to the PRC of the Hambantota Port, now the second largest port in the country after the Port of Colombo, is often referred to as the classic example of China’s “debt-trap diplomacy” in action. It funds construction projects such as this one, which is of considerable value to the PRC because it enables the Belt and Road maritime shipping linkages, at initially highly favorable rates to the host country. When the host country can longer afford the payments, China then takes control of the property it built. It does all that while still holding the host country hostage for the payments on the loan, though often at reduced amounts, delayed payment schedules, and lower interest rates.

The Mattala Rajapaksa International Airport. Built at a cost of over $200 million by Chinese contractors and with Chinese funds, this was conceived at one time as a means of linking the Hambantota Port, the new commercial mini city being built at the Port of Colombo, and as a means of expanding tourism to Sri Lanka. It may have been the lure of finally having a modern airport which could connect the tiny Asian nation to the rest of the world that convinced the corrupt and inept government to agree to this deal, but it has proved a dismal failure. It is referred to internationally as the “world’s emptiest international airport, for now.

The Norochcholai Coal Power Plant. This $1.35 billion power plant had a staggering cost that once again Sri Lanka could not afford. But once finished it has become notorious for regular shutdowns because of technical issues and for dumping of toxic waste into the air and surrounds.

The Colombo-Katanayake Expressway. This highway, which is the primary vehicle artery linking the capital city of Colombo with its primary airport, cost $292 million to complete.

Thanks to these and other projects, Sri Lanka has racked up estimated outstanding debts of $12 billion owed to Beijing.

Considering that Sri Lanka’s total accumulated debt from all sources is now approximately $83 billion, out of a total GDP of just $74 billion in 2022 which fell by $18 billion since 2021, the country is in no position to pay back any of the debt it has accumulated from these.

What that means first is that neither the existing Chinese investments in the country nor the new deepwater container ship seaport the U.S. is funding will probably ever be paid back.

But that is of course not why either country has bought into new infrastructure and construction in Sri Lanka. It is instead about positioning for both. In China’s case there is also a belief that, given enough acreage which the country has to turn over to it to prevent foreclosure on its biggest loans, Beijing has designs to use that land to build a branch military base which would be of tremendous strategic value for it as well and enable it to ultimately take over Sri Lanka completely and have a substantial presence right next to India, its arch rival in Asia.

In addition, with Chinese investments vast outstripping those of the U.S. already and positioned with far more control over those facilities than the United States may have, it is hard to imagine the U.S. will ever have more than just a foothold in Sri Lanka, let alone much control even over the deep seawater port it is building. Beyond that, with Sri Lanka continuing to teeter on the brink of total financial collapse from all sources, if that does happen China will be in far better shape to take over the remains of what is left. It would most likely do so by establishing a puppet government, but the effect is the same.

In the end, it could turn out that after the U.S. spends money it also must borrow and guides the contractors involved to complete the Colombo West International Terminal as envisaged, it could even lose control of that terminal if Sri Lanka goes under as an independent nation. Time will tell, but it is worth wondering if the U.S. might have picked a better first major project than this as part of its poorly conceived $600 billion planned pushback to China’s Belt and Road Initiative.