In Hambantota, instead of waiting for phase 1 of the port to generate revenue as the Ramboll team had recommended, Mahinda Rajapaksa pushed ahead with phase 2, transforming Hambantota into a container port. In 2012, Sri Lanka borrowed another $757 million from China Eximbank, this time at a reduced, post-financial-crisis interest rate of 2 percent. Rajapaksa took the liberty of naming the port after himself.
By 2014, Hambantota was losing money. Realizing that they needed more experienced operators, the SLPA signed an agreement with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years. China Merchants was already operating a new terminal in the port in Colombo, and China Harbor had invested $1.4 billion in Colombo Port City, a lucrative real-estate project involving land reclamation. But while the lawyers drew up the contracts, a political upheaval was taking shape.
Rajapaksa called a surprise election for January 2015 and in the final months of the campaign, his own health minister, Maithripala Sirisena, decided to challenge him. Like opposition candidates in Malaysia, the Maldives, and Zambia, the incumbent’s financial relations with China and allegations of corruption made for potent campaign fodder. To the country’s shock, and perhaps his own, Sirisena won.
Steep payments on international sovereign bonds, which comprised nearly 40 percent of the country’s external debt, put Sirisena’s government in dire fiscal straits almost immediately. When Sirisena took office, Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China. Of the $4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota. The Central Bank governors under both Rajapaksa and Sirisena do not agree on much, but they both told us that Hambantota, and Chinese finance in general, was not the source of the country’s financial distress.
There was also never a default. Colombo arranged a bailout from the International Monetary Fund, and decided to raise much-needed dollars by leasing out the underperforming Hambantota Port to an experienced company—just as the Canadians had recommended. There was not an open tender, and the only two bids came from China Merchants and China Harbor; Sri Lanka chose China Merchants, making it the majority shareholder with a 99-year lease, and used the $1.12 billion cash infusion to bolster its foreign reserves, not to pay off China Eximbank.
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Before the port episode, “Sri Lanka could sink into the Indian Ocean and most of the Western world wouldn’t notice,” Subhashini Abeysinghe, research director at Verité Research, an independent Colombo-based think tank, told us. Suddenly, the island nation featured prominently in foreign-policy speeches in Washington. Pence voiced worry that Hambantota could become a “forward military base” for China.