Colombo Port City: China's New Special 'Colonial' Zone

On May 24th, 2021, the Sri Lankan Parliament approved the Colombo Port City Economic Commission bill after a two-day debate, with a 148-59 majority. The bill, introduced first in April, 2021, aims to provide for a Special Economic Zone (SEZ) in the Colombo Port City project. It also seeks to set up a commission govern the USD 1.4 Billion project, and facilitate processes such as granting of registrations, licenses, authorizations and other approvals, to operate businesses in the 269-hectare SEZ. The new Act came into effect on 27th May.

The legislation did not have a smooth sailing from its very conception; during a review by Supreme Court after bill was challenged by several sections of Sri Lankan civil society, many of its provisions were deemed inconstant to the country's Constitution. This led to a 'stinging rejection' of the bill. The Supreme Court also determined that several other provisions of the bill required either a super majority in Parliament to be enacted, and in some cases both two thirds in the House and a referendum of the people.

The bill was reintroduced after necessary amendments were made as per objections raised by Supreme Court, and the government imploration carried the promises of investments and economic growth opportunities, leading to the bill's eventual passage. Interestingly, Sri Lankan Government had tried to limit time frame open for its citizens to challenge the law for the precise reason that it may be passed without Supreme Court Determination. This, it is indicated, is because they wanted to push the bill through Parliament "in the form Beijing preferred".

This is evidenced by the fact that the bill was tabled in Parliament in April at the time when Sri Lanka celebrates its New Year holiday season. According to several reports, the bill included concessions made by the current Nandasena Rajapaksa government in lieu of financial assistance from China worth over USD 500 billion in order to service external debt of Sri Lanka.

These provisions parliamentary oversight and control over taxation, included exemption to port city companies from customs and inland revenue regimes, and other financial measures. Another controversial feature of the bill was that the statutory commission for Colombo port city SEZ did not need to have only Sri Lankan citizens as members.

These provisions led an increasing dread among the Sri Lankan people that the Commission will essentially become a tool for Beijing to expedite creation of what increasingly is becoming apparent as a Chinese colony within Sri Lanka. These were not idle fears; there has been a rising footprint of China in the Sri Lankan economy and political processes. For instance, President Gotabaya Rajapaksa on Friday inaugurated the China-Sri Lanka Friendship Hospital in Polonnaruwa in June, 2021, with a Chinese grant of USD 60 million.

A more notable example however came within days of Colombo Port City Commission Act, when China Harbor Engineering Company (CHEC) won a bid for a 17-km elevated highway near Colombo. he terms of the deal allow CHEC to own the highway, recover the principal and earn profits for 18 years, making it the first foreign company in Sri Lanka to have ownership of a highway. CHEC has a major project portfolio, including Colombo Port City, Mattala airport, and Hambantota port.

The tender was given the CHEC proposal of developing the highway with build-operate-transfer (BOT) model, even though multiple studies had deemed BOT model infeasible for the particular stretch. Notably, CHEC'S parent company, the state-owned China Communications Construction Company (CCCC), has been blacklisted in US and Bangladesh over several corruption and graft charges.

CHEC itself has been reported to have been charged with bribing officials and corruption several times within Sri Lanka. Investigations also suggest that CHEC funded former president Mahinda Rajapaksa's election campaign in 2015, with over USD 1.1 billion going into accounts of Rajpaksa's supporters involved in election work.

However, with the Colombo Port city, the illicit nature of Chinese ingression has dug a deeper rabbit hole. The Colombo Port Bill would have vested supreme control of the city in a commission that all but laid a red carpet for Chinese control. The sweeping power China has been afforded over the potential financial hub had two interconnected implications. First, it undermined Sri Lankan sovereignty, as the law of the land would not have applied on financial hub in its entirety, which in turn would have prevented Sri Lanka from carrying financial intelligence and scrutiny over the hub.

This, in turn, would have meant that Chinese companies could easily operate in the region without many legal ramifications, which may even have led to illegal operations and money laundering. According to Sankhitha Gunaratne, deputy executive director of Transparency International Sri Lanka, lack of proper oversight could transform the Port City 'into its own jurisdiction beyond the reach of Sri Lankan law and offer a safe haven for criminal proceeds.'

This case looks at the predicament of a small nation burdened by Chinese debt, accumulated by infrastructure projects under the aegis of China's One Belt One Road initiative. By 2016, the government of Sri Lanka owed China $8 billion (almost 10% of GDP) mainly from loans taken to construct a series of infrastructure projects, many of which proved commercially unviable. Most of these were approved by the previous government under President Rajapaksa.

The Colombo Port City project was the grandest and most ambitious of them all. Conceived as a project to create high-end real estate through off shore land reclamation, it was hastily approved as a joint venture between a Chinese SOE and the Sri Lankan government in 2014. This project proved controversial from the beginning due to its purported effect on the environment and gave rise to vigorous public protests.

There were also serious concerns that the deal placed onerous obligations on the Sri Lankan government, including a compromise of its sovereignty. The latter is of special concern to Sri Lanka's largest trading partner and influential neighbor - India.In early 2015, a new government came to power having promised to suspend this project and promptly did so within a few months. However, this was done without realizing the full implications of the deal signed in 2014. This entitled the Chinese company to seek compensation for the suspension - a consequential amount for a country already burdened with debt.

Further, they began to face significant diplomatic pressure from China. Therefore, the new government is now faced with the delicate task of renegotiating the deal to ensure it is more palatable, both publicly and geopolitically, within the limited room for maneuvering available. What strategy must Sri Lanka deploy and what must it prioritize in this negotiation?

A recent exposé also revealed that the Bill is also riddled with major conflicts of interests from government officials. For instance, a lawyer employed as Senior Legal Consultant in CHEC Colombo Port city is well known to have personal links with Secretary to the President. There are several other examples of Chinese companies like CHEC which have cultivated connections, directly or indirectly, with people in Rajpaksa government that may influence the policy decisions and legislations in their favour.

China is embedded in the creation of the Colombo Port city itself, as Sri Lanka had taken loans from China to finance establishment of what the incumbent government envisioned as an international investment hub. While the initial loans by China carried low interest rates, the costs for construction of the port city raked high, leading to Sri Lanka pursuing further loans from China. In return of additional financing, Beijing increased the interest on loans.

The increased loan costs, along with the fact that Chinese loans came with condition of using Chinese labour and materials for construction that simply costed more, forced Sri Lankan government into a debt trap. As of April 2021, Sri Lanka owed over USD 5 billion to China, even after subsidization of debt due to handing over of the Hambantota port project to China on a 99-year lease.

In this context, the alterations made on Supreme Court direction to the new act are welcome, they do very little to assuage fears of Chinese colonialism. The lack of know how in Sri Lanka for operating major offshore financial centres would mean that the Port City is either doomed to be a 'ghost city' in short term, or will be manned by Chinese human resource imports.

Recent incident of Chinese workers found in 'military uniform' in Sri Lankan construction projects has also ignited fears that China may potentially use its influence in Sri Lanka to turn the ports into PLA outposts. With Sri Lanka's government bending backwards to allow concessions to China, the possibility of Colombo Port City becoming the neo-colonial, charter city construct may not be too far.


The writer is a lawyer and
former Secretary of World
Peace Council.