What the Belt and Road initiative means for business in Sri Lanka
Belt and Road Explained: South Asia
The Belt and Road in Sri Lanka
Chinese investment in Belt & Road (B&R) projects in Sri Lanka has generated some controversy, but stakeholders focused on the long-term potential for Sri Lanka see growing opportunities for business in the country. As well as investments in transport infrastructure and real estate, China’s long-term commitment to the country suggests the positives for local business will outweigh the problems.
Navigating the right start
When the People’s Republic of China celebrated its 68th anniversary in 2017, the occasion was marked in Sri Lanka with particular fanfare since it also marked the 60th anniversary of diplomatic relations between the two countries. In recent years, and especially since the launch of the China-led Belt and Road (B&R) initiative, closer economic ties have become the focus of this longstanding relationship, with successive governments in Colombo seeing the long-term potential and ancillary benefits of the country becoming a vital link in the Maritime Silk Road (the ‘road’ in the Belt and Road initiative).
It’s fair to say that such long-term benefits have been overshadowed by concerns about various infrastructure projects that have been emblematic of China’s B&R push in many countries. These include the construction of the USD1.5 billion cargo port at Hambantota, in Sri Lanka’s far south, the first phase of which predated the formal launch of B&R and opened in 2010. Accompanying this was Sri Lanka’s USD253 million second international airport, at Mattala, some 20km from the port. Both projects were financed for the most part by loans from China’s Export-Import Bank.
These projects, along with a colossal 25-year initiative to develop 269 hectares of reclaimed land in Colombo (known as Port City), the first USD1.4 billion-phase of which is being undertaken by a subsidiary of China Communications & Construction Co, were initiated by Sri Lanka’s previous government. Elections in early 2015 led to a change of leadership and a temporary rethink of several projects, including Port City, which was restarted in 2017 after an environmental impact review.
There had also been concerns about the financing model in the face of the underutilisation of Hambantota Port and Sri Lanka’s rising debt burden. Partly to address this, in 2017 the port was leased to China Merchants Port Holdings for USD1.12 billion as part of a debt-for-equity swap in which the Chinese firm holds a 70 per cent stake in a joint venture with the state-run Sri Lanka Ports Authority (SLPA). The government is currently considering the future operations of Mattala airport.
Testing the waters
These issues have taken the headlines, but stakeholders focused on the long-term potential of the B&R for Sri Lanka have looked beyond short-term problems to the growing opportunities for business in the country. For one thing, Hambantota sits near one of the world’s busiest shipping lanes – through which China currently imports two-thirds of its oil. Ongoing discussions around further investment in a refinery, which would be Sri Lanka’s largest, and an investment zone of about 6,000 hectares, suggest jobs creation and growth opportunities for ancillary businesses.
“Hambantota is a clear positive,” says Saurav Anand, Standard Chartered Economist for South Asia. “We have observed a lot of investor interest in the special economic zone (SEZ) around the port and much related to capacity building in terms of power plants and roads.”
Though Chinese firms will obviously continue to play a large role, “local corporates will have the opportunity to engage with those interested in capital investments and possibly partner, or set up joint ventures,” explains Jim McCabe, Standard Chartered CEO in Sri Lanka. “The fact that Sri Lanka as a relatively small country is on China’s radar, and is deemed to be in a sweet spot from a location perspective, creates a constant reason to continue probing into what else can be done.”
McCabe cites one example of a Standard Chartered client that imports and distributes gas. It recently set up a storage facility in the industrial zone around Hambantota Port, from which gas imported from the Middle East will be used both to meet domestic demand and to ship to other countries in the region. The project was financed by Sinosure, even though it was a comparatively small sum for the Chinese export credit and insurance group. Having dipped its toes in the water, Sinosure got excited about the prospect of doing more business in a country to which it previously had very little exposure, McCabe says, but in which it saw bright prospects.
A looming mega-city
The impact of the ambitious Colombo Port City project stands to be dramatic. Eventually home to 120 structures including a brand new international financial centre, “Port City will be game-changing for Colombo,” reckons McCabe, with the investment expected to bolster tourism and investment from across Asia. China Harbour Engineering Company, which is building the city, estimates it will bring as much as USD15 billion in foreign direct investment – which in 2017 for the country as a whole totalled a record USD1.63 billion.
“Once the land is reclaimed and set up, it will usher in a whole new mindset,” McCabe says. “Already the world’s major real estate brokers are trying to get global architects to come and design signature buildings; Shangri-La has invested USD1 billion in a hotel; there are office towers and condos going up.” Among the first was a project built by the subsidiary of the Aviation Industry Corporation of China, which when complete will have four towers and 608 apartments.
“The larger agenda for this is to create a broader interest that will encompass other companies, such as services, technology and manufacturing that will follow the lead” of the pioneers, says McCabe. One quick impact is likely to be in the tourism sector, a key part of Sri Lanka’s economy. In 2017 China was second only to India as a source of tourists to the country, with nearly 270,000 visitors – compared to just 12,000 in 2010.
A speedier road ahead
Regardless of initial concerns about financing there is no shortage of appetite for China-financed-and-built projects in Sri Lanka. As recently as mid-May news emerged of a further USD1 billion loan from China to build a highway linking Colombo to the central town of Kandy.
This renewed commitment to the B&R vision suggests the government is focusing on the long-term opportunities it will present for the country. Such support is of course vital for the projects to achieve their maximum potential. “How well the government enables and facilitates investment [around B&R-linked projects] will determine the speed of success,” McCabe says. “There’s no going back: it’s already significantly developed, and the only thing left to determine is how fast the country will drive.”
Key to this is the promotion of Belt and Road investment as a partnership, a narrative that is necessary to reinforce given the vastly different size of the two nations’ economies (at USD84 billion Sri Lanka’s GDP ranked above only four Chinese provinces in 2017). “The problem is it’s David and Goliath,” says McCabe. This requires some deft manoeuvring by Colombo: “Now we’re partners [with China], let’s get in place the rules, regulations and policies to make sure it’s a balanced relationship.”
This is part of the reason why Sri Lanka’s government has said it wants to take its time in agreeing a free-trade agreement with China. But it is almost certain that negotiations on this front will bear fruit – as did Sri Lanka’s earlier FTA with Singapore, signed in January. The long-term vision of being a nexus for trade remains the key to realising the opportunities of the B&R.
As McCabe says, “As investment flows in then the economic boost from the projects will be evident, giving Sri Lanka the chance to integrate more heavily into trade flows from China, through ASEAN and the Belt and Road.”