Hambantota Port – Myths and Realities

The Port of Colombo is located near the route between the Strait of Malacca and the Suez Canal, which is one of the busiest shipping lanes in the world. Around 36,000 vessels pass annually on this key corridor between Asia and Europe, including about 4,500 tankers. As the Port of Colombo has been traditionally used as a transshipment hub for container ships, the Sri Lankan authorities thought it wise to construct the new Port of Hambantota on the island's southern tip as a bunkering and repair hub.

The Port of Hambantota commenced operations on a small scale in 2010, prior to China’s Belt and Road Initiative (BRI). The BRI is a contemporary response to the post-WWII European Recovery Program, better known as the Marshall Plan, which was designed by the US to bolster Western European economies after the war. The Belt and Road Initiative has over 140 signatory parties, including EU members. China has so far initiated around 3500 BRI-related projects worldwide, mostly in low- and middle-income countries, and Hambantota Port is one such initiative.

The government of Sri Lanka’s first significant loan for Hambantota was obtained from China’ Export Import Bank (Exim) for a sum of $307 million. Accompanying this loan was a condition that China Harbor Engineering Construction (CHEC) would construct the port. It is not unusual for China to insist that its state-owned enterprises have exclusive rights to build projects financed by Chinese banks.

Long-term lease

Contrary to popular belief, the debt servicing costs on account of the loans obtained from Exim bank were not significant in the overall context of the external loan portfolio of Sri Lanka, with loan installments (including interest) amounting to less than five percent of Sri Lanka’s total external debt repayments. As the second phase of the Hambantota port project has not commenced, loans for this phase have not been obtained.

Five loans for the port (excluding loans obtained for a bunkering facility project) were acquired in the period from 2007 to 2014. Including concessionary loans, the entire loan portfolio pertinent to the construction of Hambantota port amounted to $1.263 billion. One possible disadvantage to the concessionary loan structure could be that the payback period was not too long and had an in-built shorter grace period, but Chinese loans in such projects are regularly rolled over.  

The scandal surrounding the “Hambantota port sale” is not justified as the acquiring transaction was not contingent on default by Sri Lanka on its external debt to China’s Exim bank; rather it was a lease arrangement for a period of 99 years at a consideration of $1.12 billion. Sri Lanka has not transferred ownership of the port. The arrangement of the lease is distinct from loans pertinent to port construction and it is noteworthy that the lease was not accompanied by cancellation of debt due by Sri Lanka to China.

Substantive port operations and accompanying revenues are now the exclusive domain of China Merchants Port Holdings Company (CMPort), which was transferred an 85 percent stake  effective December 2017. For the sake of appearances, Sri Lanka retains a 15 percent stake in the joint stock company. Significantly, foreign countries are not permitted to use Hambantota's port facilities for military purposes without obtaining permission from the Sri Lankan government.

Maritime Wisdom

The debate over the wisdom of developing Sri Lanka's second port will remain until Hambantota port is in full swing commercially. Despite government-commissioned feasibility studies finding that a port at Hambantota was not economically viable, the project went ahead. Emboldened, CMPort sought an additional 15,000 acres of land around the port to develop an industrial zone. The business model of the project catered to bunkering, but the creation of the turning basin itself disrupted the ill-conceived project. After dredging and then flooding of the land, a huge boulder was exposed which would be an impediment for the entry of oil tankers. It took CHEC almost a year to blast it away, and speculations abounded over whether the charges of the contractor ($40 million) were justified.

From a port construction point of view, facilities have been developed for refuelling, quays and four berths for ships. For protecting the port from the ocean swell, two breakwaters measuring 312 meters and 988 meters in length were constructed using material excavated from the construction of other parts of the port. The project incorporates interlocking concrete blocks to protect the port from high seas. The access channel for the port is 210 meters wide and 17 meters deep to cater to vessels up to 100,000 dwt. The project envisages an oil depot housing eight tanks for marine fuel, three for aviation fuel and three for liquid petroleum gas (LPG). The first phase of the project was completed in the year 2010. The next proposed phase is ambitious and includes dredging for a deeper basin, quays, berm breakwater revetment and the fashionable artificial island (a typical feature in the East, Far East and Middle East).

Business modeling indicated that Colombo and Hambantota are appealing as domestic and transshipment container handlers respectively. As Hambantota Port was floundering commercially in its early years, car carrier vessels were diverted to give it some traffic, but the situation remained dismal: only 34 ships berthed at Hambantota in 2012, while 3,667 vessels berthed at Colombo in that year.

Can Hambantota Port Divert Bunkering from Singapore?

Singapore retained its position as the world’s prime bunkering destination in 2018 with annual bunker sales volume nearing close to 50 million tonnes. The hallmark of Singapore’s bunkering success is transparency, driven by mandatory installation of flow meters,  stringent regulatory checks  and a one-window digitalized approach. Over decades, Singapore has developed its infrastructure for refining and storage to supply vessels with fuel.

For Hambantota Port to thrive, Sri Lankan policymakers need to appreciate the Asian bunkering fuel market. Only about 10 ports sell bunker fuel in significant quantities, since ships can traverse long distances without refueling. China’s bunkering destinations are behind Singapore with annual bunker sales of 16.9 million tons. Chinese maritime policy makers are establishing the Zhoushan archipelago as a bunkering hub and establishing advanced crude oil refineries to produce greater volumes of very low sulfur fuel oil, accompanied by tax exemptions so that marine fuels produced by these refineries are internationally competitive. The provincial authorities have pumped in almost $80 million to expand the anchorage and construct additional shipping channels at Zhoushan.

Fledgling bunker destinations like Hambantota also need to envisage the development of supply chains for LNG bunkering, which is increasingly available in the leading bunkering destinations. In the current economic scenario prevailing in Sri Lanka, whether Hambantota Port’s sponsors can arrange additional investment for LNG infrastructure remains a question mark.

LNG bunkering stations are constructed with LNG storage facilities equipped with multiple LNG bunkering facilities integrating divergent bunkering mechanisms. Europe is the leader in LNG bunkering, having most of 50 bunkering stations in operation and 13 more bunkering stations under construction. Singapore, China and South Korea are striving to join the fuel supply chain revolution. In China, an inland LNG bunkering station network has come of age, a coastal LNG bunkering station is being explored and around 300 vessels converted to LNG powered fuel. These established LNG players have a head start over Hambantota Port.

Nadir Mumtaz is a maritime analyst based in Pakistan.