A costly mistake? By Gagani Weerakoon
While the government has been attracting much criticism over its excessive loan taking for various development projects, it has now come under flak from the opposition for ‘incorrectly’ renegotiating with China to increase a previously agreed upon interest rate of 1.3% to 6.3% on a loan of US$ 306.7 million taken for the Hambantota Port Project.
The main opposition United National Party (UNP), bringing the matter to Parliament, questioned why the government had renegotiated with the Export-Import (Exim) Bank of China, to increase the rate of interest from 1.3% to 6.3%, an increase of 5%, on the loan of US$ 306.7 million, which it had obtained to construct the Magampura Mahinda Rajapaksa International Harbour, Hambantota.
UNP MP Dr. Harsha de Silva, raising an oral question in Parliament, asked Project Minister of Ports and Highways, Rohitha Abeygunawardena, why such a move was made, when in practice, re-negotiations are held to reduce bank loans or interest rates, and not to increase rates.
On being further questioned by de Silva whether the minister was aware about the government taking an additional loan of US$ 153 million from China for the Hambantota Port Project in January 2013, Minister Abeygunawradena responded, saying: “We did not obtain a loan from China in January 2013, but we took an additional loan of US$ 147 million for the Hambantota Port Development Project at 2% interest from Exim Bank of China. Altogether, we have received US$ 306.7 million from China for the harbour project. Though we had earlier decided to pay 1.3% interest, consequent to negotiations between the two parties, the government had agreed to pay 6.3% interest per annum.”
MP de Silva, then questioned why such a decision was taken, to which Minister Abeygunawardena said, the responsibility lies with the Finance Ministry as it was that ministry that had negotiated the funding from the Chinese bank.
Failed expectations
The Magampura Mahinda Rajapaksa Port (MMRP), opened two years ago with the aim of increasing the number of cargo ships berthing at the Port, and rejuvenating bunkering, which at this point in time has proved to be a failure as claimed by the opposition.
It is said the MMRP, built on 1,750 hectares of land in the Rajapaksa constituency in Hambantota at a massive cost of US$ 1,300 million, lies forlorn with occasional ships calling at its docks. The Port, which has the capacity to handle over 30 vessels at any given time, has ships only occasionally dropping anchor. Sources say that ships dock at the MMRP because they are compelled to do so by the government in its endeavour to generate traffic at the new seaport.
The Opposition had, from the inception, been critical of the project. They have questioned the need for a second Port for a country as small as Sri Lanka. The argument centred on the adequacy of the Colombo Port, which could efficiently handle all ships that call in on the island. It is estimated that around 4,000 vessels call at the Colombo Port, annually.
Moreover, the bunkering facility of the MMRP, which was built on the lines of Singapore’s mega Port, remains desolate for want of ships calling over at the Port. It is said that MMRP is able to feed 220,000 MT of fuel supply each year. Singapore’s hub Port lifts 30 million tonnes of bunker, annually, and is the most sought-after Port in Asia. It has around 130,000 ships calling at its port annually, and over one million visitors cruise into Singapore, every year.
The MMRP was built by obtaining loans from the Exim Bank in China, in two instalments. The first phase of the building was estimated at US$ 306 million, which was borrowed at an exorbitant 6.3% rate of interest. The second phase cost a massive US$ 800 million, also at the same rate of interest. Other expenses, including the cost of blasting rocks, cost US$ 202 million. The total cost according to the Sri Lanka Ports Authority (SLPA) is US$ 1,308 million. The loan has to be repaid in 11 years, in biannual instalments.
Repaying massive loans to China
With no ships calling at the Port, the question that arises is how can Sri Lanka repay the massive loan it had obtained? The MMRP has to generate at least Rs 8 billion a year to pay its annual instalment of Rs 6 billion, thereby honouring its commitment to repay the loan. But, with no business being generated, due mainly to ships not docking at the MMRP, sources said the burden is on the management of the Colombo Port to honour the financial commitments of the MMRP by generating sufficient funds to meet all costs. “The MMRP is a burden on the Colombo Port. The Colombo Port is paying back the capital and the interest on the monies borrowed,” the opposition said.
According to Minister Abeygunawardena, who submitted an answer on the loans obtained for the MMRP, the US$ 306.7 million was initially obtained on +0.9% interest according to interest rates on LIBOR rates. Later, based on a request by China, the government has agreed upon 6.3% fixed interest rate as the interest rates in the market started falling.
“The government would incur a loss of Rs 2 billion due to this ill-timed decision, whereas the recorded income of the MMRP so far is only Rs 341 million,” Dr. de Silva noted.
However, when contacted, Director General of the External Resources Department, A. Kumarasiri, said the agreement was reached on the directives of the Central Bank of Sri Lanka after taking into consideration the conditions at the time in the world market.
“The interest rates in the market fell and LIBOR rates were constantly fluctuating. Taking the prevailing situation into consideration we did the best thing available. I do not believe this would incur any losses for the government,” he said.