Written by Sandeep Bhardwaj.

In December 2017, Sri Lanka handed over its southern port of Hambantota to China on a 99-year lease, raising red flags amongst security experts in South Asia and the West. For many, the deal seems a way for Beijing to get a strategic foothold in the Indian Ocean. For others, it is an evidence of Beijing’s growing neo-imperialist tendencies, evoking parallels with the 99-year lease of Hong Kong which the British had forced on China in the nineteenth century. Some even suggest that the deal is part of Beijing’s modus operandi: to encourage impoverished nations to undertake debt-laden projects and then forcibly acquire them. The deal even spooked New Delhi enough for it to enter into negotiations with Colombo to acquire an airport close to Hambantota port under a 40-year lease.

China’s decade-long influence-building project in Sri Lanka has proved to be ineffective.

However, on closer inspection, the hypotheses of Chinese machinations do not hold. It is evident that the deal has been largely motivated by prestige issues, rather than economic or security considerations. In fact, far from being an example of China’s well thought-out power expansion, it is a case study of Beijing struggling to learn how to translate its economic might into political influence and failing spectacularly.

China’s economic penetration into the island nation took off in the late 2000s by the invitation of then President Mahinda Rajapaksa. At the time, Rajapaksa, fresh from his victory in the Sri Lankan Civil War, was eager to deliver fast-paced economic growth by drawing upon international investments and loans. Unfortunately, most Western countries viewed the island as a risky investment opportunity, given Colombo’s frequent inexplicable policy shifts and government restrictions. Worse, Sri Lanka was denied several preferential economic deals with the European Union and the United States because of human rights issues arising out of the civil war.

In China, Rajapaksa found his salvation. In the post-2008 era, Beijing was burgeoning with surplus capital but struggling to compete with Western capital for safe and reliable investment locales. Instead, China increasingly turned to invest in risky Asian and African countries, where it hoped that its massive economic leverage would allow it enough political purchase to safeguard its investments. Sri Lanka became one such location. Beijing was even happy to go along with Rajapaksa’s policy of state-driven investments, where the Colombo government retained control over the planning and execution of the projects. Indeed, from 2011 to 2014, China pumped in a quarter of the total Foreign Direct Investment (FDI) flowing into Sri Lanka. It also supplied nearly 40 percent of all of Colombo’s foreign borrowing in 2010-14.

Hambantota port was just such a project. Rajapaksa had dreamed of a port at Hambantota – his constituency as a Member of Parliament – since the early 2000s, arguing that the location had the potential to turn into a major transshipment hub for global shipping. The American consultants who were first brought on to study the project declared it unfeasible. Undeterred, Rajapaksa asked Beijing to finance the project and construction began in 2008 with loans from Chinese banks.

Unfortunately, since its opening in 2010, the port has proved to be a colossal failure. While it consumes nearly one-third of Sri Lanka’s annual port management budget, it generates only one-tenth of the revenue generated by the port of Colombo. Even this revenue figure is misleading since it largely represents the shipments from Indian car manufacturers who are being forcibly directed by the Colombo government to use this port. On their own, only 19 ships visited the port in 2015; in 2016 this figure fell to 14.

Indeed, the story of Hambantota port is mirrored in the larger Sri Lankan economy. After the debt-fuelled growth in late 2000s and early 2010s, the country’s economy ran into trouble by the middle of the decade. The optimistic projections fell flat on the ground when faced with reality. In 2015, a new government was elected on the promise of greater fiscal prudence as well as moving away from Sri Lanka’s dependence in China. The new government under President Maithripala Sirisena sought help from the International Monetary Fund (IMF) rather than Beijing to stabilize the country’s accounts. IMF support came with stringent conditions of fiscal reforms which Colombo has been steadily implementing.

Part of these reforms involved figuring out a solution for the billion-dollar hole created by the Hambantota port. The result was the decision to handover 70 percent of the stake in the port and its management to Chinese companies, in exchange for them writing down close to US$ 1.1 billion of Sri Lanka’s debt and a promise to plow in US$ 600 million into the port.

By all indications, the port does not represent a lucrative investment and is unlikely to pay off in the medium-term. Issues of management and infrastructure aside, the port faces several structural problems which would be difficult to overcome. For instance, its depth is only 17 meters, a far cry from the average 30 or 40 meters depth boasted by major hub ports. Moreover, mere acquisition of the port doesn’t guarantee strategic advantages to the Chinese Navy. After all, unlike the nineteenth century, a country cannot expect extraterritorial rights and military privileges merely by investing in a foreign country. Hambantota port will still remain under the Sri Lankan jurisdiction and the Colombo government has already ruled out any possibility of Chinese naval presence at the port. Barring a radical shift in Sri Lanka’s overall foreign policy, there is slim chance of Beijing enjoying any strategic advantages out of the port.

In fact, the most likely explanation for Chinese decision to acquire the port is a face-saving one. Beijing, eager to retain its dwindling influence in Colombo under the new government and hopeful of salvaging some of its investment, has decided to throw more money into the problem. Moreover, the port has already been declared a part of China’s prestige mega-project – the Belt and Road Initiative. Under the circumstances, acquiring the port and turning it into a half-way functional project is the best-case scenario that China could hope for.

Indeed, on the larger scale, Beijing’s investment drive into the island has proven to be of questionable value. Despite pumping in enormous cash, China still lags behind India as Sri Lanka’s biggest trade partner. Its economic penetration has also failed to produce strategic dividends – the only military concession that Colombo has granted it was the permission to dock its submarines in Colombo port (even this approval has since been rescinded). Politically, even during its close relationship with the Rajapaksa government, China was unable to control the direction of its investments or force Colombo to adopt a prudent fiscal policy (IMF was able to do so with a much smaller cash infusion).

Moreover, since 2015, China’s political influence has steadily receded with the Sirisena government openly criticizing Chinese economic penetration. Taken as a whole, China’s decade-long influence-building project in Sri Lanka has proved to be ineffective. Rather than evidence of China’s calculating global power, it is a case study of Beijing, inexperienced in operating the levers of political influence and economic leverage, struggling to make headway in the highly volatile world of Asian politics.

Sandeep Bhardwaj is a researcher at the Centre for Policy Research specializing in South Asian geopolitics. He writes on South Asian history at revisitingindia.com. Image Credit: CC by Mahinda Rajapaksa/Flickr.

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