China Eximbank provides RMB 862.6 million government concessional loan for Phase I of the Hambantota Port Development Project (Ancillary Works and Supply of Equipment) (Linked to Record ID#33256)

China Eximbank provides RMB 862.6 million government concessional loan for Phase I of the Hambantota Port Development Project (Ancillary Works and Supply of Equipment) On April 24, 2013, China Eximbank and the Government of Sri Lanka signed an RMB 960 million government concessional loan (GCL) agreement [CHINA EXIMBANK GCL (2013) 18 TOTAL NO. (463)] for Phase I of the Hambantota Port Development Project (Ancillary Works and Supply of Equipment).

However, the face value of the GCL was eventually reduced to RMB 862,604,893.

The Government of Sri Lanka on-lent the proceeds of the GCL to Sri Lanka Ports Authority (SLPA) — the state-owned operator of major commercial ports in Sri Lanka.

The end-user (SLPA) was expected to use proceeds of the loan to finance 100% of the cost of a $147 million commercial contract that it signed with a consortium consisting of China Harbour Engineering Company (CHEC) and Sinohydro Corporation Limited (SCL) on May 17, 2012.

China Eximbank disbursed RMB 237,955,105.04 in 2013, RMB 120,862,986.24 in 2014, RMB 54,326,219.49 in 2015, and unknown amounts in subsequent years. The loan's amount outstanding was RMB 862,604,892 as of December 31, 2016 and RMB 632,576,921 as of June 30, 2022.

The purpose of the project was to deepen the harbor basin one additional meter, dredge for approaching channel, provide additional work on the oil terminal, generate breakwater and revetment modification and handling facilities, provide a new administration and services building, and change specification of navigational aid and price escalation.

CHEC and SCL were the contractors responsible for project implementation. Project implementation commenced on April 24, 2013 and reached completion on April 24, 2015.

However, Phases I and II of the Hambantota Port Development Project (HPDP) encountered financial management problems, debt repayment challenges, and corruption allegations.

Hambantota Port generated lower-than-expected container traffic and proved to be commercially nonviable under SLPA ownership. Consequently, SLPA could not service its loans to China Eximbank.

In response, China Merchants Port Holdings Company Limited (CMPort) — a subsidiary of China Merchants Group (a Chinese state-owned enterprise) — purchased a majority ownership stake in the port and the right to operate and develop it for 99-years.

More specifically, on July 29, 2017, China Merchants Port Holdings Company Limited (CMPort), a subsidiary of China Merchants Group, and Sri Lanka Port Authority (SLPA) signed a 99-year concession agreement and formed a joint venture to operate Hambantota Port.

According to the terms of the joint venture agreement, CMPort acquired an 85% stake in Hambantota International Ports Group (HIPG) and a 49.3% stake in Hambantota International Port Services (HIPS), representing about 70% of the total equity.

CMPort was also granted the operating and management rights of HIPG and HIPS as well as the lease and development rights of approximately 11.5 square kilometers of land in the Hambantota port area.

CMPort agreed to make a total equity investment of $1.12 billion, of which $974 million would be used to acquire the 85% stake in HIPG and $146 million would be deposited into a bank account in the name of CMPort in Sri Lanka (for the expansion of Hambantota Port and shipping-related business). According to a July 20, 2017 Cabinet Memorandum entitled ‘Hambantota Port Concession Agreement’ (No.

MPS/SEC/2017/32) that was approved by Sri Lanka’s Cabinet on August 4, 2017, when the concession agreement was signed, responsibility for repayment of the China Eximbank loans that were contracted for the construction of Hambantota Port was transferred from SLPA to the General Treasury.

Given that the General Treasury was also identified as the recipient of the $974 million cash infusion from CMPort, many media outlets and commentators reported that the arrangement represented a ‘debt-for-equity’ swap.

However, the Government of Sri Lanka continued to have difficulty servicing its debts to China Eximbank for Phases I and II of the HPDP after 2017.

On April 12, 2022, the Government of Sri Lanka announced a ‘pre-emptive’ sovereign debt default, noting that it would suspend debt repayments to all external creditors other than multilateral institutions.

This decision to suspend external debt service affected all of the China Eximbank loans that were issued for Phases I and II of the HPDP.

Another source of controversy arose in June 2018 when the New York Times reported that $7.6 million had been transferred from a Standard Chartered Bank account controlled by China Harbor Engineering Co. (labelled ‘HPDP Phase 2’) to affiliates of President Rajapaksa’s re-election campaign.

The New York Times also reported that checks worth $1.2 million (linked to the ‘HPDP Phase 2’ bank account) were delivered to President Rajapaksa’s official residence.