Sri Lanka Ports Authority (SLPA) will receive an inflow of US$ 1.1 billion (Rs.165 billion) Foreign Direct Investment (FDI) with the conclusion of the negotiations and the signing of the final agreements, for the Hambantota Harbour this year.
The receipt of US$ 1.1billion will help improve the country’s Balance of Payments (BOP) position as this will be an inflow to the financial account of the BOP. “The major advantage of this inflow is its non-debt creating nature, which is particularly beneficial to the country.It will be added to the country’s external reserves thereby strengthening the external position of the country.
“The increased foreign exchange reserves will help in providing greater stability to the exchange rate as well, a Development Strategies and International Trade Ministry release said.With this investment the government will have a number of alternative options in the way of utilising the foreign inflows of US$ 1.1billion (about Rs. 165 billion). One was is the utilising the funds to repay expensive foreign loans thereby reducing the interest expenditure and future debt burden of the country.
The second is the utilising the funds for financing the budget deficit in 2017. (If selected, this option will effectively reduce the domestic borrowing requirement of the government budget for this year helping to maintain lower domestic market interest rates.”
Utilising the funds for liability management purposes i.e. switching to longer maturities to reduce bunching of debt service payments in another option. In a bid to take maximum use of the Prot a Framework Agreement has been signed between SLPA and China Merchants Ports Holding Company (CMPCH).
Under the initial proposal, 80% stake to state-owned CMPCH and 20% to SLPA has been proposed. Accordingly, negotiations are going on for the final terms and conditions, which will be agreed upon a mutually beneficial basis to both parties. The government has assured that under no circumstance, will Sri Lanka’s stake be less than 20%. Hambantota port development project Phase I commenced in 2008 and it became operational in November 2010.
Phase II of the project commenced in November 2012 and at present, it has been completed substantially at a cost at US$ 808 million. Once completed, the Hambantota port will occupy an area of 1,815 hectares and, according to the Master Plan, it will have the capacity to accommodate 33 vessels at a time.
Once it is fully operational, it will be the world’s largest port, built on land and will be able to handle up to 05 million TEUs per annum.
The port saves three days of sailing time and fuel for the ships, which are otherwise compelled to divert to the port of Colombo. Around 200 to 300 ships sail through this route daily. Hambantota port is strategically positioned in terms of domestic trade perspectives also.
However since the commencement of the commercial operations of the phase I in 2010, the performance of Hambantota port has not been satisfactory as it has incurred substantial losses. Meanwhile, the annual debt service payments, which are currently made by SLPA, amounted to about US$ 73 million (Rs. 10.6 billion) in 2016.
This situation has seriously threatened the financial viability of the project. In fact, SLPA is compelled to divest a significant portion of its revenue to repay the debt incurred from the construction and loss-making operations of the Hambantota port. Making things worse, it is running at severe under-capacity at present.
The completion of the remaining work needs a substantial amount of further investment. In this context, the infusion of further capital to complete the project, by way of loans virtually does not exist given the already weak public finances of the country and the need for resolving the issues related to the Rs. 9,500 billion debt burden of the country. The government and SLPA has the responsibility of making debt service payments as well as bearing the losses of the Hambantota port.The project is expected to be complemented by railway and highway networks, an oil refinery and associated facilities as well. The government expects to develop the Hambantota port with industrial zones in the area. In this context, Chinese investors have already expressed the willingness to invest in Sri Lanka.
It is extremely important to understand that entering in to a Concession Agreement to develop the Hambantota port is not a new initiative by this government.
In fact, SLPA (as per the Act No. 51 (Section 7-1 (a)), did sign a Supply, Operate and Transfer (SOT) contract in 2014 related to the Hambantota port for a joint venture with the Chinese.
(SS)
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