China Eximbank provides $600 million preferential buyer’s credit for Phase II of Hambantota Port Development Project (Linked to Record ID#33481, #39024 and #39025)

China Eximbank provides $600 million preferential buyer’s credit for Phase II of Hambantota Port Development Project On September 17, 2012, China Eximbank and the Government of Sri Lanka signed three loan agreements for Phase II of the Hambantota Port Development Project (HPDP): a $51 million China Eximbank buyer’s credit loan (BCL), a $600 million China Eximbank preferential buyer’s credit (PBC) [CHINA EXIMBANK PBC 2012(42)Total No (230)], and an RMB 1 billion China Eximbank government concessional loan (GCL) [CHINA EXIMBANK GCL 2012(22) Total No 424].

However, the face value of the GCL was eventually reduced to RMB 700,365,503. The BCL is captured via Record ID#39025. The PBC is captured via Record ID#39023. The GCL is captured via Record ID#39024.

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

It was originally envisaged that SLPA would use the proceeds of the BCL, PBC, and GCL to finance 100% of the cost of a $808.1 million commercial (EPC) contract that it signed with China Harbour Engineering Company (CHEC) on December 31, 2010.

The GCL disbursed RMB 381,500,000 between 2012 and 2016, unknown amounts between 2017 and 2018, and RMB 318,793,357.83 in 2019. The GCL’s amount outstanding was RMB 673,428,368 as of June 30, 2022.

The PBC disbursed an unknown amount in 2012, an unknown amount in 2013, $147,249,692.27 in 2014, and $21,049,128.50 in 2015. As of December 31, 2019, it had achieved a 100% disbursement rate ($600 million out of $600 million). The PBC’s amount outstanding was $600,000,000 as of December 31, 2016 and $484,615,385 as of June 30, 2022.

The BCL was cancelled in 2019 and never disbursed.

Phase II of the Hambantota Port Development Project (HPDP) envisaged the construction of a large industrial area and a shipyard facility and required the acquisition of 1,500 hectares of land.

It involved the construction of a quay wall (2140 m long) to accommodate 6 container berths, oil terminal (300 meters long), yard & roads, a flyover bridge, deepening of entrance channel (450 m wide, 840 m long, 18 meter deep), 2 feeder berths, construction of an artificial island (50 Ha) & handling facilities, and excavating a new basin area.

Upon completion, it was envisaged that the port in Hambantota, deeper than the one at Colombo, would be used as a refueling and docking station for the Sri Lankan Navy. CHEC was the general EPC contractor responsible for HPDP Phase II implementation. Phase II was formally launched on November 18, 2010.

However, construction did not begin until September 16, 2012, a day before the three loan agreements were signed. Phase II was originally slated for completion in November 2015. A formal port handover ceremony took place on December 11, 2017. However, as of December 31, 2017, Phase II had still only achieved a 96% physical completion rate.

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.