Agitations against Indian and Chinese investments may adversely affect FDI in Sri...

Agitations against Indian and Chinese investments may adversely affect FDI in Sri Lanka

P K Balachandran,

Agitations against major Indian and Chinese projects in Sri Lanka, trigged by a fear of domination by these powers, may adversely affect the investment climate in the island and reduce the flow of Foreign Direct Investment (FDI) at a time when Sri Lanka desperately needs FDI to tide over a severe resource crunch.

Because of politically-inspired agitations by workers and political parties, work on the China-funded and built US$.1.4 billion Colombo Port City was stopped for nearly an year in 2015. Changes sought in the management system to run the China-funded and built US$ 1.4 billion Hambantota port after  an opposition led agitation, created a  major rift between Sri Lanka and China.

The sudden stoppage of work on the India-funded 500 mw power plant in Sampur caused dismay in India. And now, demands are being made for the retrieval of the 99 oil storage tanks in Trincomalee given to India through  a bilateral agreement in 2003. This has upset India.

While both India and China will try to adjust to the unstable and unpredictable political situation in Sri Lanka given the strategic need to have a foothold in the island, Sri Lanka’s stock as a destination for FDI is bound to fall if policy instability induced by  a volatile polity becomes endemic.

Sri Lankan governments have entered into deals with foreign countries without due consultation with all stakeholders and without regard to consequences for the future. The Hambantota port was built although it was known that it would  not be viable for years. Unable to pay pack the loans taken by the government, the Ranil Wickremesinghe government wanted the Chinese to buy 80% of the shares and take the port for 99 years. In addition, China was to be given 15,000 acres of land in the port’s vicinity. This opposition called a halt to this move  and got the government to reduce China’s equity to 60% after ten years of operation. But China is yet to agree to this.

Trincomalee Oil Tanks

In the case of the Trincomalee oil tanks, the government has been making various conflicting demands depending upon the political climate at any given point of time.

The 99 World War II vintage oil tanks each with a capacity of 12,000 mt were laying unused till 2003 when the Sri Lankan government decided to offer it to the Lanka Indian Oil Corporation (LIOC). While India had had an eye on Trincomalee since 1987 to dominate the Bay of Bengal, the Sri Lankan government felt that the Tamil Tigers rebels would not dare to attack oil tanks if the Indians were in-charge.

The agreement signed by the  Sri Lankan government’s Treasury Secretary, the Lanka LIOC, and the Ceylon Petroleum Corporation (CPC) on February 7, 2003 envisaged the transfer of all the 99 tanks and the land on which they were standing  to the LIOC on a 35 year lease for an annual payment of US$ 100,000.

But although the tanks would be in the hands of the LIOC, the Sri Lankan would have access to them to fulfill national and security needs, the agreement said. The agreement could be annulled only with the consent of both the parties.

Between 2003 and now, the LIOC has invested US$ 15 million in renovating 17 tanks in the Lower Tank Farm. It has plans to spend another US$ 17 million to refurbish some of the 84 tanks in the Upper Tank Farm. The tanks in the Upper Tank Farm remain un-refurbished and un-used because of the 30 year war and the unstable political conditions and the ethnic tension which have prevailed in the island since the war ended in 2009.

However, in 2013, when India did not support Sri Lanka on the UN Human Rights Issue and downgraded its representation in the Commonwealth Summit in Colombo, the Mahinda Rajapaksa government unofficially indicated that it would take back the tanks from the LIOC as the CPC had no right to transfer the land to the LIOC. But the government backed out of this threat when India said that  the 2003 bilateral agreement could not be annulled without both parties agreeing.

When Rajapaksa was defeated in the January 8, 2015 Presidential election, one  of the key issues was the alleged “sell out” to the Chinese in many big ticket projects given to them by Rajapaksa. The Indians too had advised Sri Lanka that they should ensure that Sri Lanka’s strategic national assets remained with Sri Lankans.

Against this background, when the Maithripala Sirisena-Ranil Wickremsinghe government offered to give 80% stake in the Hambantota port for 99 years to a Chinese state owned company in return for U$ 1.2 billion, the opposition led by Rajapaksa cried hoarse saying that it was a “sellout.”

But to the dismay of the Indians, while the government was trying to change the terms of the Hambantota agreement, it also raised the issue of the ownership of the Trincomalee oil tanks.

In 2016, the government indicated that it would take back 16 tanks and give it to the Ceylon Petroleum Corporation because it needs more storage space. The CPC then sent a team to inspect the tanks .But the LIOC objected saying that if the CPC wanted to store petroleum it could put in a request and the LIOC would do the needful.

The government then said that it wants to develop the 84 tanks in the Upper Tank Farm as a Joint Venture between the LIOC and CPC on the basis of a study done by consultants Earnest and Young. For the sake of the India-Sri Lanka friendship, New Delhi agreed to this and discussions have been going on between the two governments.

Parliamentary Committee

Meanwhile, the parliamentary Committee on Public Enterprises (COPE) alleged infirmities in the 2003 agreement. It said that the land lease agreement had not been signed; and the LIOC had not paid its lease dues regularly. Therefore, the 99 oil tanks must be taken back from the LIOC ,it said.

In its defense, LIOC said that it has been paying the lease fee of US$ 100,000 every year without fail. It had been paying its taxes too. In 2016-2017 it had  paid LKR 30 billion as tax out of an earning of LKR 80 billion.

The  LIOC said that the Land Lease Agreement was not thought to be necessary as the land was transferred by the government through the 2003 agreement under the signature of the Treasury Secretary.

Discussions in Delhi

On April 24, a day before the departure of Prime Minister Ranil Wickemesinghe to New Delhi, seven petroleum sector trade unions went on an indefinite strike to press the government to take back the tanks as they alleged that the LIOC is making profits while the CPC is making loses.

Wickremesinghe is expected to discuss the matter with Indian Prime Minister Narendra Modi on April 25. But the focus will be on forming a Joint Venture to run the tank farm rather than the issue of taking back the tanks.

Sources in Delhi said that while India will be accommodative, it will on no account countenance the handing back of the tanks without its full concurrence.