China Faces New Competition as Japan, India Eye Sri Lanka Port

Jon Herskovitz and Iain Marlow
China Faces New Competition as Japan, India Eye Sri Lanka Port

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India, Japan and Sri Lanka are weighing the development of a terminal at the bustling port of Colombo in a country that’s seen ongoing political controversies related to investments from China’s Belt and Road initiative.

The three countries are set to sign a memorandum of understanding in the coming months to build out the east container terminal at the Port of Colombo, according to an Indian government official who asked not to be identified, citing rules.

India and Japan will seek private sector investment and a terminal operator after the framework agreement is signed, with India likely providing easy credit, the Indian official said. Sri Lanka will control 51% of the project with India and Japan jointly controlling the other 49%, this person said. Unlike the Chinese-owned Hambantota port in southern Sri Lanka -- which has been heavily criticized -- the Colombo port project is a commercially viable venture, though it should not be viewed as a counter to China’s Belt and Road, they said.

Japan has supported the Port of Colombo’s development since the 1980s in recognition of the importance of a free and open Indo-Pacific, said Natsuko Sakata, a spokeswoman for the Ministry of Foreign Affairs. "Nothing has been decided at this moment on any policy of our new assistance regarding the port of Colombo,” she said in a statement sent by email.

Japan has also pushed its plans to be a bigger player in the region under its “Free and Open Indo-Pacific Strategy.”

A Sri Lanka government official, who asked not to be named citing rules, said the deal with India and Japan would soon be finalized. Japan would provide a 40-year Yen loan with a 10-year grace period, with Sri Lanka holding 51% and Japan and India jointly holding 49%.

Two months ago Sri Lanka’s Port Minister Sagala Ratnayaka told parliament the Ports Authority was procuring cranes from Japan for the Colombo port’s east terminal. The country was seeking to "attract more shipping lines, especially shipping lines which operate the largest ships in the industry," he said, noting at the time India was a possible partner. Sri Lanka previously tried to court Indian investment in Hambantota’s empty airport.

The move reflects India’s new openness to cooperate with Japan, the U.S. and other Indo-Pacific powers in its immediate neighborhood, said Constantino Xavier, a foreign policy fellow at Brookings India. "China’s Belt and Road Initiative investments in South Asia and the Indian Ocean region have forced Delhi to be more proactive in offering reliable alternatives to Beijing’s rising economic clout."

Chinese Investment

Sri Lanka has been one of the countries drawn to China’s Belt and Road Initiative, an ambitious plan announced in 2013 by President Xi Jinping to build an estimated $1 trillion of infrastructure to support increased trade and economic ties and further China’s interests around the globe. However, China’s politically controversial investments in Sri Lanka became an election issue in 2015 and fueled infighting between politicians in the capital.

One project in the country includes Port City Colombo being built by China Communications Construction Co., or CCCC. The plan envisions a financial district -- pitched as a new hub between Singapore and Dubai -- with a marina, a hospital, shopping malls, and 21,000 apartments and homes.

State-owned CCCC, one of the world’s largest companies with annual revenue greater than Procter & Gamble Co. or FedEx Corp., says its portfolio of 700 projects in more than 100 countries outside China has a value of more than $100 billion. It is also one of the most vexed. CCCC and its subsidiaries have left a trail of controversy in many of the countries where they operate, with many of its projects criticized as debt traps.

The nine-year-old Hambantota port in southern Sri Lanka -- with almost no container traffic and trampled fences that elephants traverse with ease -- has become a prime example of what can go wrong for countries involved in Belt and Road. Sri Lanka borrowed heavily to build the port, couldn’t repay the loans, and then gave China a 99-year lease for debt relief.

(Updates with Sri Lanka comment in sixth paragraph.)

--With assistance from Anusha Ondaatjie.

To contact the reporters on this story: Jon Herskovitz in Tokyo at jherskovitz@bloomberg.net;Iain Marlow in New Delhi at imarlow1@bloomberg.net

To contact the editors responsible for this story: Brendan Scott at bscott66@bloomberg.net, Ruth Pollard, Unni Krishnan

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