In Sri Lanka’s political folklore, no two countries can be friendlier than China and Sri Lanka. Indeed, for six decades from 1952 to 2014, Sino-Lankan relations could not have been warmer. But in the last two years, the two countries have drifted apart, with hot words exchanged between Chinese Ambassador Yi Xianliang and Sri Lankan Finance Minister Ravi Karunanayake recently.
The contentious issues have their roots in the extraordinary influence China enjoyed in Sri Lanka in the second phase of President Mahinda Rajapaksa’s regime, an influence which in the view of the present government, casts a heavy financial burden on Sri Lanka. The Rajapaksa government, which fought the Tamil militants with Chinese weapons, and got USD 15.5 billion from China for post-war development projects when the West was hounding it for human rights violations, returned Beijing’s favour by allegedly allowing Chinese companies to overinvoice the cost of their projects, and took loans from Chinese banks at very high rates of interest.
But a significant section of the Sri Lankan polity began to ask inconvenient questions about Rajapaksa’s China-funded projects. The post-war anti- Rajapaksa movement, which initially focused on his authoritarianism, nepotism and corruption, grew into an anti-China movement with opposition leaders and media exposing serious financial flaws in Sino- Lankan deals. Projects worth millions of dollars had been given without competitive bidding.
Matters came to a head when, in the January 8, 2015 presidential election, Rajapaksa lost to the joint opposition candidate Maithripala Sirisena. The pro- Sirisena United National Party (UNP) then won the July 2015 parliamentary elections.
Among the first post-election steps taken by Sirisena and Prime Minister Ranil Wickremesinghe, was the suspension of projects funded and executed by China. This shook Beijing particularly because the iconic USD 1.4 billion Colombo Port City had been inaugurated only a few months earlier by President Xi Jinping. In its defense, China said that every project was cleared by the concerned Sri Lankan government agencies, the Cabinet and Parliament.
It denied charges of corruption, overinvoicing and rapaciousness. It pointed out that going back on the agreements would only give Colombo a bad name among foreign investors. But Colombo would not budge. Writing in the Sunday Times, transport and highways expert Prof. Amal S Kumarage of Moratuwa University said costs of China-funded highway projects were 55% higher than the global norm. Internationally, the cost should be between USD 7 million to 10 million per km. But in the case of Chinese projects in Lanka, they were 55% to 135%, and five–to–ten times higher than in India.
Economist and Deputy Foreign Minister Dr Harsha de Silva pointed out that the Outer Circular Highway (OCH) costs USD 56 million per km. The China-built Kaduwela-Kadawatha section of the OCH costs USD 43 million per km, but the Japanese/ADB funded Kottawa- Kaduwela section had cost a third of it, he said. The interest on Chinese loans are also higher. Chinese ambassador Yi Xianliang claims that the majority of Chinese loans are at 2% but the Sri Lankans put it at 6%. According to Dr Silva, even 2% is “very high” given the fact that Japanese and ADB loans are available at 0.1 to 1%. The USD 342.8 million loan for the Kelani bridge was taken from Japan at 0.1%. It is to be repaid in 40 years with a 10-year grace period.
The USD 520 million taken from China for the Outer Circular Highway involves an interest of 2% plus 0.25% as service charge. For roads in Hambantota, USD 100 million was taken from China at 3.5%. And interest rates were hiked or brought down without assigning any reason. Initially, the interest on USD 350 million taken for Hambantota Phase I, was 2%. This was subsequently increased to 6.3%. But for Phase II, when USD 808 million was taken in installments, the interest varied from 2 to 4%. In the process of renegotiating interest rates, the Chinese were given exclusive use of four berths in the harbour. While the government was reexamining the terms, Wickremesinghe made two trips to Beijing to persuade China to convert into equity, the USD 1.5 billion debt incurred for the non-performing Hambantota harbour, and the USD 300 million incurred for the non-functioning Mattala airport. Finance Minister Rav i Karunanayake claimed China agreed to take an 80% equity.
But Ambassador Yi denied it saying talks were still on. Chinese think tanks have opposed any move to buy into loss making ventures in Sri Lanka, especially when Chinese companies have to work with the “inefficient and corrupt Sri Lankan public sector institutions”. China might like to continue with the present arrangement as regards Hambantota port, where China has exclusive use of four berths. China already has under its control, the profitable Colombo South Container terminal.
Beijing is now accusing Colombo of being unprofessional and lackadaisical. Ambassador Yi recently lashed out at Karunanayake for his unilateral claim about Hambantota and his contention that China is rapacious.
Yi maintains that China charges only 2% interest, while European countries charge 5%. If indeed China is charging 6 %, why does Colombo ask for more and more loans, he asked. Yi charged Sri Lankans of being inefficient and lackadaisical and also “ungrateful” to China which has already sunk USD 15.5 billion in Sri Lanka. But unfazed, Karunanayake told newsmen, “If China is charging only 2% interest, we will pay only 2%. Isn’t that good for us?”