Sri Lanka's Colombo Port City: The Frontline Of China And India's Geopolitical Showdown
How a new financial district is shaping regional politics.
The story goes that in 2011 Sri Lanka’s then-president Mahinda Rajapaksa looked out from the land reclamation site of Colombo's emerging South Container Terminal and had an epiphany: why not just keep going and build an entirely new city district? The idea was as pragmatic as it was visionary -- the area next to the new port was silting up naturally anyway.
Whatever the reasoning behind its origins may be, the ensuing project would become the largest infrastructure undertaking in Sri Lanka's history. Called Colombo Port City, it was to be a $1.4 billion financial center of skyscrapers, luxury hotels, shopping malls, and a marina that was destined to shake up Sri Lanka's economic and geopolitical landscape.
The new mini-city will be built entirely on 269 hectares of land reclaimed from the sea, stretching out from the coastline to the north of Colombo's famed Galle Face Green, an old colonial recreational ground.
Foreign-directed development is set to continue here, as the primary financial backer and builder for the port city is China -- perhaps the only country in the world with the economic clout, the reason, and the will to take on such an ambitious, expensive, and potentially game changing endeavor.
Colombo Port City is back online. The land is slowly being reclaimed from the sea. Image: Wade... [+]
The Colombo Port City project commenced in September of 2014 with no lack of fanfare and pomp. Both Mahinda Rajapaksa and Chinese President Xi Jinping were there to cut the proverbial ribbon, with the latter’s presence demonstrating just how important this project is to China.
It’s the location of Sri Lanka that’s of prime interest to the Chinese. Sitting in the Indian Ocean right below the tip of India, in-between Southeast Asia and the Middle East, Africa, and Europe, it's a core station along China's lifeline to its energy suppliers in the Middle East and Africa. Since ancient times, Sri Lanka has served as a major maritime junction for cargo being moved across the Eurasian landmass, which is to be enhanced by China's plan to turn the country into a major hub on their 21st Century Maritime Silk Road, the watery part of the Belt and Road, a network of land and sea routes designed to bolster and secure trade routes to and from China.
However, Colombo Port City is intended to make this logistical heartland into something more than just a place to transship containers. It is to be a major financial center, rivaling Singapore to the east and Dubai to the west, providing direct access to the colossal markets of the Indian Subcontinent, while boosting Sri Lanka's intake of foreign capital and increasing local employment opportunities in the process.
Colombo Port City will extend right out from the Chinese-run South Container Terminal. Image: Wade... [+]
Unlike the Hambantota projects, which started out as Sri Lankan developments financed with Chinese loans, Colombo Port City is Chinese FDI -- the largest single incident of foreign investment in Sri Lanka's history. The monetary backing and construction was taken on by the China Harbor Engineering Corporation, a subsidy of China Communications Construction , a Chinese state-owned enterprise (which has been blacklisted by the World Bank on allegations of corruption).
As of now, China will be given a lease on 110 hectares of the port city for 99 years, which is roughly two-fifths of the total project area -- the rest of the land will go to the Sri Lankan government. Originally, China was to receive freehold rights to 50 hectares of the project, but due to strong objections from India over China indefinitely owning and operating territory so close to their borders this was eventually whittled down to 20 hectares, and then, as of this month, no freehold rights at all.
However, Colombo Port City is to become a quasi extra-territorial zone that will have many of its own laws and the authority to offer favorable trade, investment, and tax policies that are different from that of broader Sri Lanka.
The southern limit of the land reclamation area for the emerging 269 hectare port city. Image: Wade... [+]
Colombo Port City was meant to jump start Sri Lanka’s economy and re-establish it in the global theater as a place that has more than just forest resources and beaches for tourists, and the project was rolling fast . . . and then Mahinda Rajapaksa unexpectedly lost the presidency.
After running on a platform that criticized the incumbent for his strong ties and allegedly corrupt and unfavorable business deals with China, the opposition party led by Maithripala Sirisena, claimed that they would cancel Colombo Port City outright and reevaluate the deals behind some of Sri Lanka's other Chinese-backed projects. And when the opposition came to power in January 2015 that's exactly what they did.
But then a month later they flipflopped. In February, just before Sri Lanka's new foreign minister visited China, the government backtracked on their previous position and gave the go ahead to the port city project.
Then a month later they flipflopped again. In March, just before Narendra Modi became the first Indian prime minister in 28 years to visit Sri Lanka, Colombo Port City was again postponed.
Apparently, this was what Sri Lanka's ambition to re-balance relations with India, China, and the West looked like from the ground.
Sri Lanka's relations with India and the West had been on a downward trajectory due to Rajapaksa's methods for ending a two decade war with the separatist Tamil Tigers. This resulted in the EU's GSP-Plus trade concessions not being renewed, aid from the US and Canada being cut, and eventually charges of war crimes by the UN’s Office of the High Commissioner for Human Rights.
Work getting ready to begin again on Colombo Port City. Image: Wade Shepard.
The political and economic vacuum that ensued from the West turning its back on Sri Lanka was what ultimately opened the door for China to so prominently step in to lend "a helping hand in a time of need," a common Chinese diplomatic strategy. In the years that followed, China gave $37 million in military aid to Rajapaksa, as well as F-7 fighter jets, antiaircraft guns, and radar systems. China also began investing heavily in non-military projects. In addition to Colombo Port City, China dumped massive amounts of funding into Sri Lanka's new highways, ports, and airports, totalling $8 billion in loans.
“Previously there was a big shift towards the East away from the West,” explained Deshal de Mel, a senior economist at Hayleys Plc in Colombo. “So now they are trying to add a little more balance to it. Not necessarily at the expense of China but kind of to give more prominence to India, the US, the EU, to kind of re-balance relations.”
Workers inside the port city project area. Image: Wade Shepard.
This lapse in relations with China during the initial stage of Sirisena’s presidency evidently proved successful. India became a close political partner yet again, the UN’s Office of the High Commissioner for Human Rights was accused of going easy on the war crimes investigation, the EU took steps to reinstate GSP-Plus trade concessions, and the US reopened the flow of aid to welcome Sri Lanka back into the fold.
However, China didn’t take the sudden shift to Sri Lanka’s diplomatic back burner passively. China Harbor Engineering Corporation allegedly refused to stop reclaiming land for the port city after Sirisena ordered them to do so, prompting Sri Lanka to threaten them with a lawsuit. Then the Chinese came back at Sri Lanka with a lawsuit of their own, seeking $143 million in compensation for delaying Port City construction between March and August of 2015. It soon became clear that if Sri Lanka didn’t check their pivot back to India and the West that they would be sacrificing future Chinese investment, loans, and political cooperation.
These buildings that are currently on the coast will soon be inland. Image: Wade Shepard.
To put it mildly, India isn't pleased about China moving into what has historically been their backyard, encircling the country with major investment and infrastructure projects in Pakistan, the Maldives, and Bangladesh, in addition to Sri Lanka. The thinking is that these commercial projects could one day have military or other strategic implications -- an apprehension that wasn't eased when Chinese Naval submarines equipped to carry torpedoes and missiles popped up in Colombo's harbor on two occasions in 2014.
"So that was controversial in India and they felt that there was a risk that China is going to have naval interests and a security presence there and how that would affect India's own geopolitical position,” de Mel said.
The land reclamation site for Colombo Port City. Image: Wade Shepard.
However, China is indispensable to Sri Lanka. First of all, China is the country’s largest source of FDI, one of its leading commercial lenders, and even its biggest supplier of tourists. Secondly, China doesn’t only provide Sri Lanka with major financial benefits but also with a very heavy geopolitical counterweight that can be used to balance out the influence that other players, such as India, the US, the EU, and Japan can apply. So it was clear that relations with China needed to be repaired.
A big part of reestablishing positive relations with China meant working out the issues surrounding Colombo Port City. To these ends, the project was given the green light to continue in March of 2016, with a new agreement between China and Sri Lanka being signed in August. In exchange for dropping their lawsuit, China Harbor Engineering Corporation was allotted additional land in the project area as compensation for the losses they endured during the delay.
Relations between Sri Lanka and China appear to be booming once again — almost as though there was never a blip at all due to the change in presidency. All of Mahinda Rajapaksa’s China-backed projects are back online. Land is again being reclaimed for Colombo Port City, the Chinese operated Colombo South Port is rolling, construction on phase two of the Hambantota deep sea port is under way, Mattala airport is looking as though it may be taken over by a Chinese company, and a major economic corridor connecting together many of Sri Lanka and China’s joint projects is under discussion.
Sunset over the Colombo Port City project area. Image: Wade Shepard.
China cannot be pushed out of the Indian Ocean region. Sri Lanka, the Maldives, and Bangladesh are all hungry for infrastructure funding and FDI, and because of this there is little chance that India can keep China at bay. So India seems to be devising another strategy beyond political jockeying and muscle flexing: jumping in as an investment partner and mitigating China's influence through dilution. In Bangladesh, India's worries of China receiving the go-ahead to build a deep sea port resulted in them jumping in on a jointly operated, international port at Payra. In Sri Lanka, India is showing interest in investing in various large projects, including an impending special economic zone at Hambantota.
Sri Lanka is one of the keystone countries of Eurasia, holding together major geopolitical players on all sides, ever balancing their influences against each other, trying to get as much out of each as possible. It’s ultimately an expression of the multi-vector policy that has become popular in countries like Kazakhstan, Bangladesh, Serbia, and Georgia, where it is in a less powerful country’s best interest to align with multiple global powers rather than a single omnipotent neighbor. This is a shake-up of the previous era, where Russia, India, the US, and the EU had their respective contingents of countries where they were the primary, if not sole, geopolitical influence.
If Colombo Port City is to be a success, this multi-vector approach will more than likely be needed -- the place cannot be a mere Chinese outpost. It will need to become a fully international financial center where banks, traders, and investors come from all over Asia, the Middle East, and Europe to engage the rapidly expanding markets of the Indian Ocean region. It will need to become a place where both China and India meet in the middle in the name of business.