Revival of Hambantota International Port in Sri Lanka may strengthen China’s position in the Indian Ocean.
China’s Belt & Road Initiative (BRI) has been highly criticised for its implementation and rate of returns on numerous occasions, and one could never de-link the strategically located Hambantota International Port from the BRI.
Hambantota Port was handed over to China Merchants Port Holdings (CMPort) on a 99 year lease by the Sri Lankan government with a payment of US$1.12 billion as the Island Nation couldn’t pay back the funding capital debt to China.
Political activists and commentators often viewed this agreement between the China Merchant Port Holdings Company (CMPort) and Sri Lanka Ports Authority (SLPA) as an unfair deal. It is noteworthy that the Chinese state-owned company CMPort currently has an overall stake of 80 per cent, and the SLPA has 20 per cent.
This is one of the main reasons why Sri Lanka is quoted as a victim of the debt-trap diplomacy of China’s BRI. But now, while the world continues to battle the pandemic, the fortunes of the Hambantota port seem to be changing.
Hambantota is close to the Asian and European international shipping routes the Suez Canal and the Strait of Malacca. These routes through Hambantota are used by about 36,000 ships, including 4,500 oil tankers. The port saves about three days of sailing time and fuel.
China will certainly put in all its might to make up for the lost time in developing the Hambantota International Port as one of the most important ports in the region, and keep countries like India on its toes.
In 2015 and 2016, the Central Bank of Sri Lanka commented that Hambantota was the only port with a negative growth rate, and that it had a declining number of vessel arrivals.
The Asia Maritime Transparency Initiative noted “the economic rationale for Hambantota is weak, given existing capacity and expansion plans at Colombo Port, fueling concerns that it could become a Chinese naval facility,” a realisation that at the time prevented other lenders such as India from getting involved.
The promises of increased trade and economic wealth were quashed almost immediately as the port opened its doors in a shambolic inauguration ceremony, but the project plunged Sri Lanka into spiraling debt to China.
As a result, in 2017, the Sri Lankan government had little choice but to hand over 80 per cent of the port’s ownership to CMPort on a 99 year-long lease, along with 1,235 acres of land.
In 2018, critics pointed out to the complete abandonment of the port with wildlife roaming free on its mainly deserted premises. When the port was under the Sri Lankan government, it was barely operational due to the lack of operational investments and incapable knowledge to start up and run a port of that scale. Sooner or later, the port needed an operational partner with a comprehensive investment to meet its demands.
The CMPort invested in approx. $1.12bn to revive the port under a public-private partnership. The CMPort had to further spend at least $700800m or more to bring the port to the operational level at its full capacity.
One year after Hambantota International Port (HIP) came under its new management, the port focused on roll-on/roll-off (ro-ro) operations and doubled its business, with a 136 per cent increase in the volume of ro-ro vessels handled by the operational staff. The HIP has since diversified its services to include other port-related activities such as container Handling, General Cargo, Passenger, Bunkering, Bulk Terminal, and Gas at initial stages.
What has Changed
- The Geographic Positioning:
The geographic positioning of HIP provides advantages not just for the shipping industry but also for import/export business in general, coupled with experienced handling to ship or transship finished goods to almost any destination in the region, as the port can offer comparatively shorter timelines with just six to 10 nautical miles (19km) to the world’s busiest maritime route between the Malacca Straits and the Suez Canal linking Asia and Europe.Rapid growth in economic development in emerging markets surrounding the Indian Ocean, such as the Bay of Bengal and East Africa, has created growth opportunities for Sri Lanka’s port industry, in addition to more established maritime business with India.The deep-water terminal facility of Hambantota has the capacity to berth the largest of ships with ease and efficiency. Advantages in Hambantota include competitive labour costs, freeport facilities, ample space for storage, dry weather throughout the year. This gives HIP its competitive edge to develop as a competitive regional maritime and logistics hub.
Given the shift of the maritime industry in the coming decades regarding 2020 low sulphur cap regulations, Hambantota is an ideal location to invest in storage tanks, refineries, and liquified natural gas (LNG) bunkering facilities with higher capacity to support the global ship fleet.Bunkering is the supplying of fuel for use by ships, and includes the shipboard logistics of loading fuel and distributing it among available bunker tanks.
Another key to their resurgence is their intent to tap into the market of fuel depots in both Singapore and Fujairah, two of the largest fuel depots in the world that supply over 60 million tonnes of fuel per year.
- Becoming a RO-RO Transshipment Hub:
The port is emerging as a RO-RO transshipment hub. RoRo describes how products are loaded and discharged from a vessel. RoRo allows your products to roll on and off the vessel, as opposed to being lifted onboard using cranes. Self-propelled products such as cars and tractors roll on and off the vessel on their own wheels. The port reached its 1 million metric tonne yearly benchmark in 2019 with volumes from three sectors i.e. RO-RO, Bulk and Liquid cargo.In the pandemic year of 2020, the RO-RO transshipment hub has seen rapid growth in vehicle volumes while bulk cargo volumes have also grown by 44 per cent. Total RO-RO units handled during 2020 fell to 388,031 from 411,027 as coronavirus hit global shipping and Sri Lanka banned vehicle imports but transshipment have started to grow rapidly in recent months.By December 2020, volumes had pickup up to 58,996 units which is a rise of 25.9 per cent compared to the corresponding period in 2019, driven almost entirely by international volumes as imports dwindled to 215 units in 2020 from 4,214 a year earlier. In January 2021 the port had handled 55,068 units, up 29 per cent from a year earlier. Vehicles coming from India, Korea, Japan, and China are discharged at Hambantota for transshipment to the Middle East, South Africa, and South America.HIP said it had engaged in aggressive marketing campaign and changed the RO-RO business model, which had brought results.
- New Deals that Have Increased the Significance of HIP:
The Sri Lankan Cabinet of Ministers has approved the proposal presented by Minister of Industries to set up a ‘Smart One Stop Shop’ comprising the representatives of all relevant institutions to enable local and foreign investors interested in investing in industrial zones associated with Hambantota Port and Industries in the Southern Province. Measures have been taken to establish several industrial zones in the Southern Province in connection with the recent infrastructure development.The Board of Investment (BOI) of Sri Lanka has signed the agreement with Pearl Energy (Pvt) Ltd to launch ‘Hambantota LNG Hub’ a floating storage LNG trading facility at the port of Hambantota, bringing LNG to the doorstep of Sri Lanka, with a primary aim of trading LNG in the region utilising the strategic location of Hambantota.The agreement was signed by Susantha Ratnayake, chairman of BOI, and Tania Siegertsz, director, Pearl Energy. The total investment of the project is US$97.2 million. The LNG hub will become a landmark infrastructure development for the region, paving the way to broader access to natural gas as a primary fuel in South Asia.
Next in the line is China, which will build a US $300 million dollars’ worth tyre plant in Sri Lanka’s Hambantota port that will export nine million tyres in its first phase. Shandong Haohua Tire Co. Ltd will be given tax benefits under a Strategic Development Act, the Board of Investment of Sri Lanka said. The factory will start operations in three years and in the first phase nine million tyres, enough to fill 45,000 containers will be exported.The HIP has formed a strategic partnership with Sinopec Fuels of Lanka (SOFL) which intends to expand Sri Lanka’s share of the regional bunker market and has invested over $5m in a tanker which flies the Sri Lankan flag. Operations have now started with local bunker supplier Lanka Marine Services (LMS) as SOFL’s first buyer supplying very low sulphur fuel oil (VLSFO) to the tanker Suez Hans enroute from Chennai to Suez. The tanker refueled at the Hambantota Port anchorage via oil barge Kumana, chartered to LMS by HIP.
- The Geographic Positioning:
#Beijing‘s Sinopec Group dealing in oil, petrochemical products & gas recently commenced operations at its depot in #Hambantota Port #SriLanka, satellite images show #China‘s new fueling point for the Belt & Road/European-Asian sea route in the #IndianOceanRegion pic.twitter.com/A5RJSyDY60
— d-atis☠️ (@detresfa_) May 9, 2020
The Way Forward
Not to forget, the issues surrounding the East Container Terminal (ECT) involving India, Japan and Sri Lanka have disturbed the balance of the Indian Ocean further. The project, worth an estimated $500-$700 million, was a key marker for infrastructure investment in the island nation where Chinese projects are most prominent. More than two-thirds of transshipment at this port is tied to India, making it an important trade and connectivity link.
As a joint venture for India and Japan to invest in, the East Container Terminal (ECT) project was also expected to showcase how the two Indo-Pacific partners, and also Quad members, could provide South Asia with viable, transparent and sustainable alternatives for financing and development.
The sharp statements from New Delhi and Tokyo now reflect their deep disappointment and their suspicions about the motivations. The ostensible reason for the Rajapaksa government’s decision is growing pressure from port union groups which have opposed any foreign participation.
New Delhi has said it continues to engage Sri Lanka on the ECT issue, although it remains cold to Colombo’s alternative offer of developing the West Container Terminal. Now, the present government has decided to develop the ECT as an investment project by refraining from obtaining loans.
Secondly, the possible resurgence of the HIP may also give the much-needed impetus and belief to China and its partners when it comes the Belt and Road Initiative. Ports in Gwadar (Pakistan) and Kyaukpyu (Myanmar) may derive encouragement from this resurgence in achieving greater heights.
Finally, it is also a timely reminder for the Quad (a grouping of India, US, Australia and Japan) and other countries that China must not be written off yet. The HIP has been reinvigorated within two years. In addition to this, Sri Lanka has also cleared an energy project involving China across three islands off the coast of Jaffna peninsula mere 50km from the Tamil Nadu coast. The project is to install “hybrid renewable energy systems” in the three islands of Nainativu, Neduntheevu, and Analaitivu.
With Hambantota International Port facing better prospects, one can only imagine the rising potential of the same. India and Quad will now have to reset its outlook on the HIP, an asset that was considered dead weight only a couple of years ago.