China gains edge in Sri Lanka

Traditionally close Indo-Sri Lankan ties forged by shared culture and ethnicity and reinforced by history and legend, are showing signs of coming under strain. Partially caused by New Delhi’s failure to provide more forthcoming policy responses to Colombo’s requests, India’s diplomatic influence is now getting eroded. China stepped in to occupy the space and has, of late, begun expanding its presence in Sri Lanka. It is acquiring a meaningful presence in the political, commercial and cultural sectors. It is already influential in Sri Lanka’s defence establishment.

The development assumes significance in the backdrop of China’s uncompromising efforts to secure global acceptance of its pre-eminence in the region, which coincides with India’s shrinking influence in its immediate neighbourhood. The latter could get accentuated following establishment of full diplomatic relations between China and Bhutan and imminent resolution of their boundary issue.

In keeping with the practice followed by it in many countries, Beijing has sought to first exploit the economic and trade route. China’s investments in Sri Lanka, which till 2004, were estimated at under $250 million, increased sharply in the aftermath of the tsunami when Beijing extended assistance of $300 million. There was a noticeable spurt in Chinese lending after the defeat of the LTTE in 2009, with almost $6.5 billion being invested primarily in infrastructural projects. Bilateral trade similarly registered an increase and in the first six months of 2011, totalled $1.28 billion, or an increase of nearly 40 per cent over the previous year.

Already burdened by domestic and external debt in excess of Sri Lankan Rupees 5.5 trillion, Sri Lanka is eager for loans for its projects. China’s loans to Sri Lanka, though, are neither at preferential rates and nor as grants-in-aid, but they do offer a grace period of 4-5 years for repayment. China is learnt to have been pressurising Sri Lankan President Mahinda Rajapaksa to increase government spending on infrastructure to at least 6.3 per cent of the GDP to enable Sri Lanka become a middle income nation. Sri Lanka recently announced that it would spend $21 billion in the period 2012-2015, or 6.5 per cent of the GDP each year. China is expected to contribute more than half this amount. Additionally, in 2011, the China Development Bank Corporation agreed to provide $1.5 billion over a three year period for roads, power plants and irrigation schemes.

Chinese companies have so far bagged at least 14 major infrastructure projects in Sri Lanka, making China a major player in Sri Lanka’s development efforts. Chinese companies seem to have an edge and often bypass the tender process emerging suddenly as single bidders. The procedural opacity allows for high cost over-runs.

For example, the project for construction of a 350-metre high transmission and communications tower, on seven and a half acres of prime property along the picturesque Beira waterfront in central Colombo, was awarded to a Chinese company without competition. Construction of the $108 million-tower is being funded by China’s Exim Bank. Apparently prompted by compulsions of ensuring occupancy of the tower and revenues for its owners, the Sri Lankan government has asked the three main telecommunications service providers — Airtel, Etilsat and Dialog — to move into the tower once it is completed. This will additionally facilitate security monitoring of all communications, including by the Chinese company. Interesting, albeit unrelated, is the scandal brewing in Pakistan of a Chinese telecommunications company also emerging suddenly as the sole candidate for supply of a telecommunications trunk system with integrated security-related software.

The Hambantota Port Development project which, according to reliable inputs, was awarded to China while India was still in talks with Sri Lanka, is a prime example including of cost over-runs in projects. China lent $400 million for the first phase of the new port in Hambantota and China’s Exim bank lent $77 million for an oil bunkering facility. The cost of the first phase, originally estimated at $360 million, escalated by $40 million. The total cost of the port’s development, including the oil bunkering facility, is estimated at $600-750 million. It is assessed, however, that the cost would finally exceed $2 billion. High costs have made Hambantota port commercially unviable. To salvage the situation, the Sri Lankan authorities have directed, for a start, that all automobiles be imported only through Hambantota port, resulting in the addition of SL Rupees 40,000 to the cost price of each vehicle.

Lanka IOC’s market share will be affected if China, which has strongly indicated a willingness to invest $2 billion in the Sapugaskanda Refinery Expansion and Modernisation (SOREM) project, is awarded the contract.

Of long term significance are the inroads being made by China’s ‘soft power’. As a first step, China Radio International recently obtained a licence to operate a 24-hour FM Radio channel in Sri Lanka. It is presently broadcasting an hour-long programme in Sinhala each day directly from China via Sri Lanka’s ‘Youth FM’. China Central Television (CCTV) has also decided to telecast Chinese soaps and programmes with subtitles in Sinhalese in addition to the popular Chinese programmes telecast for the past three months by Sri Lanka’s state-owned ITN. An unbearably high rate of tax was simultaneously imposed on Sirisa TV, which used to show popular Indian tele-serials. China’s official news agency Xinhua has plans to expand its operations in the island. Beijing has also increased the number of scholarships for Sri Lankan students and an agreement was signed in October 2011, to establish Confucius Centres across Sri Lanka. The China Institute for Contemporary International Relations, affiliated with China’s intelligence establishment, has proposed a long-term partnership with the Bandaranayake Centre of International Studies.

China’s extensive ties with the Sri Lankan armed forces are expanding. The Sri Lankan government recently signed an agreement with China for the purchase of six MA-60 aircraft at a cost of $105.4 million. China has also indicated interest in a $100 million project for construction of family accommodation for Sri Lanka’s military personnel in the north and east and separately announced a grant of $1.5 million for modernisation of the Defence Services College in Colombo.

India needs to evolve steps to ensure that its influence in the region does not shrink, its foreign policy objectives and national aspirations are not compromised, and its interests are protected. It must, among other measures, capitalise on its inherent advantages and increase its lead as the largest source of tourism, direct foreign investment and export market for Sri Lanka.

Jayadeva Ranade is a former additional secretary in the Cabinet Secretariat, Government of India