China’s blank cheques: No checks and balances

Editorial-Sunday, June 02, 2013

President Mahinda Rajapaksa has just concluded his seventh state visit to China in as many years as the country’s Head of State and Head of Government. The importance — and significance — of the regularity of these visits can hardly be missed.

In the early years of his presidency, the priority was seeking Chinese military hardware to overcome the northern separatist insurgency. There was a steady supply of arms and ammunition often given on ‘tick’ (loan) through the People’s Liberation Army of China. They were meant to be Government-to-Government contracts, but with the liberalisation of China’s economy in more recent times, arms procurements were not without the taint of sleaze and scandal, but the lid was always firmly on the bin.

In the new dispensation, post-2009, the emphasis is naturally on economic development, something the Rajapaksa Government has embraced with gusto.

While the West is pre-occupied with pulling the Sri Lankan Government by its legs, so to say, and the Western-dominated lending agencies of the World Bank and the IMF hem and haw about giving conditional loans, the Chinese have no qualms in lending a helping hand with no questions asked.

Somewhat understandably, the President’s latest trip was akin to a secret visit. There were no formal announcements about his departure, and on his return, a brief media statement from his office referred to a US$ 2.2 billion (Rs. 278 billion) loan and that the two leaders held bilateral talks “encompassing several areas, strengthening Sri Lanka-China relations and laying the base for a new era of friendship and cooperation”.

Another paragraph referred broadly to Chinese funding to develop Sri Lanka’s transport sector that includes a number of expressways, including a Colombo-Jaffna expressway, road networks and railway lines, water supply projects and upgrading the national hospital in Colombo and the teaching hospital in Ragama.

In separate talks with the Chinese Export-Import Bank (Exim), President Rajapaksa made public what was already known. He said Sri Lanka has changed the development patterns inherited from the colonial period. Clearly, the West has pushed him into this corner. Read with what Sri Lanka’s External Affairs Minister said at a Beijing news conference about enhancing defence ties with China, the outcome of this visit is bound to cause ripples in many quarters in a geo-political sense. Adding to these concerns is a move to send Sri Lanka’s External Affairs Ministry officials to China for training in diplomacy.

What is dealt with here are about the borrowings. Welcome as these projects are, the nagging question in this ‘preferential bias credit facility’ towards Sri Lanka by China is about transparency — in all the loans obtained and how the money is spent.

Much of the money borrowed from China goes back into the Chinese economy. Chinese companies are doing the contract work with Chinese labour. Sri Lanka has spent a massive Rs. 391.7 billion on investment projects in the country in the last four years. This money has been allocated for five projects, of which only three have been completed but are still to serve any real purpose.
All of these projects have been undertaken by Chinese firms, and have been funded by loans obtained from the Exim Bank. Many of these loans have been taken with interest rates for long term borrowing (20 years) varying from 3% to 6%, and short-term loans at an interest of 2%.

Construction of the Hambantota port was undertaken by the China Harbour Engineering Company at a cost of Rs. 149.2 billion. The contract to reclaim the sea and build the port city adjoining the Colombo South port was awarded to the same company at a cost of Rs. 85.4 billion; the Mattala airport project cost Rs. 22.7 billion.

All of these projects were carried out by China Harbour Engineering Company and have been funded by the Exim Bank at interest rates between 3% and 6%; the Chinese have also provided the labour force; the Norochcholai power plant was undertaken by China Machinery Engineering Corporation at a cost of more than Rs. 51.2 billion; the Southern Expressway (connecting Colombo to Galle) was also handled by the China Harbour Engineering Company at a cost Rs. 68.3 billion; the Nelum Pokuna theatre in Colombo provided Sri Lanka with its first state-of-the-art concert hall at a cost of Rs. 3.08 billion — only 60% of the loan was financed as a grant by the Chinese government.

Sri Lanka is now embarking on a project to construct the largest tower in Asia (down D.R. Wijewardene Mawatha in Colombo at a cost of Rs. 11.9 billion. The construction will be carried out by China National Electronics Import and Export Corporation and Aerospace Long-March International Trade Col. Ltd.

The total commitment made by China from 2007 to 2011 was US$ 2.13 billion. Of this amount US$ 2.1 billion came as loans and US$ 24 million as grants.

In the months to come, China’s Exim Bank will provide a loan of $278.2 million to Sri Lanka to help lay a 27 km single-line rail track connecting Hambantota and Matara; the Chinese government is giving US$ 240 million in loans to build infrastructure in southern Sri Lanka; China’s Exim Bank is financing the construction of flyovers and roads in the southern town of Hambantota with the aim of making it a transport hub; Sinohydro Corporation was given the construction of the Moragahakanda Project, which is the second largest tank ever built in Sri Lanka, at a total cost of US$ 382 million.

In the absence of the Right to Information Law that exists in more 100 countries around the world, but not in China or Sri Lanka, how these loans are expended, how much goes as commissions to individuals who farm out the contracts and how much to political party coffers, and how much is wasted is never known. And, these are loans that future generations will have to pay off.

The other issue is how wise it is to put all the country’s eggs into one basket and how indebted the country will be to one country, mindful that Sri Lanka’s geographical importance in the scheme of world affairs is not to be downplayed. But that is another issue.
That the Chinese have a geo-political strategic interest in the waters around Sri Lanka is only too well known. If all these projects are for the wellbeing of future generations, well and good, but serious questions have arisen over the prudence and feasibility of some showpiece projects executed with these Chinese loans.

One of the painful but beneficial aspects of World Bank/IMF loans was that there was a certain amount of fiscal discipline attached to them. Recipient nations, like Sri Lanka, had to work hard and show results to secure the loans. In so far as the Chinese loans are concerned, there seems to be a carte blanche or virtual blank cheque. It is almost as if while the Washington-based banks compromise the present for a better future; the Beijing bank works on the reverse theory.

Securing loans from a bank/nation ever-willing to lend is not as difficult as how you spend that money. Every loan, whether from Washington or Beijing has strings attached.