A Chinese death trap
On June 21 this year, Mahinda Rajapaksa as Minister for Ports and Highways signed a Cabinet Memorandum stating that the Government had signed a Memorandum of Understanding (MOU) with China Development Bank Co Ltd., (CDB) to the tune of 15 billion rupees.
Accordingly Rs. 15 billion worth of contracts the cabinet paper says have already been awarded to China.
Therefore, CDB has now agreed to finance a further USD 500 million for road projects for which negotiations are currently being held.
Another USD 1.5 billion has been promised by China Development Bank as financial assistance within three years for the construction of roads, bridges, water supply and irrigation schemes.
The government has planned to upgrade 2,510 kilometers of national roads in the next two years.
This will include the construction of two flyovers in Hambantota at an astronomical cost of Rs. 6 billion. One is to be constructed at Mattala airport and the other at a bypass road junction in Hambantota. They will cost Rs. 3,090 million and 2,890 million rupees respectively.
Director General for the Department of External Resources has informed the Secretary, Ministry of Ports and Highways to call for quotations from three Chinese contractors nominated by CDB.
The three nominated contractors are: China National Aero-Technology International Engineering Corporation (CATIC), Shaanski Xianyang Highway and Bridge Construction Company /Xi’an Dagang Road Machinery (DAGANG) and Hunan Construction Engineering Corporation (HUNAN).
Bids have been invited from these three contractors for twenty contract packages with the approval of the Standing Cabinet Appointed Procurement Committee (SCAPC).
The Technical Evaluation Committee appointed to evaluate proposals have already submitted their respective reports on the evaluation of eleven of the twenty contracts selected on a priority basis by the RDA.
The contracts include road projects in Agalawatte, Aluthgama, Pitigala, Dimbulagala, Madampe, Rambukkana and Hambantota.
The Northern A9 road of which a major portion was previously funded by the ADB has been handed over to the Chinese who have taken over the project after being forced to offer a soft loan. Soft loans and grants from China is very minimal. That said, the cost of the project is USD 570.3 million (approximately Rs. 55 billion.) A diplomat quipped this must easily be the most expensive road in the world!
The sections are Nedunkerni-Puliyamkulam Road towards Mullaitivu, Odddusudan to Nedunkerni Road (towards Mullaitivu) Jaffna – Pallali Road and Jaffna to Point Pedro. The projects are under the guidance of China Railway No. 5 Engineering Group, China Aero Technical Engineering Group and China Hydro Corporation.
It is an economic death trap. Sources in the Treasury and Economic Development Ministry say Chinese investments are expected to surpass USD 2.0 billion per year from 2011-12 onwards.
I am reminded of an anecdote. It is the month of August, on the shores of the Black Sea. It is raining and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one. The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.
The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower. The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism…
And that, ladies and gentlemen, is how Sri Lanka is today.
An analysis of the ongoing projects in Sri Lanka suggests that most of the projects were under planning for decades, but were held up either due to lack of funds or due to lack of political will. For instance, the Hambantota port project had been under planning for over two decades. However construction began by China only in 2008 after Beijing agreed to fund and implement the project. Similarly, the Norochcholai power project was on the drawing board since 1988, but actual construction began only in 2007 after China was roped in.
In 2006 Chinese assistance was worth less than USD 300 million. Since 2006 Chinese “assistance” has grown exponentially albeit at the benign behest of President Mahinda Rajapaksa and his family.
Other projects like rebuilding of railway lines and the reconstruction of roads in the North and East began to take shape only in 2009 after the military defeat of LTTE. Here too China was quick to make an offer to the government and grab the projects. Other countries and multi lateral institutions were slow to conceive the projects and find out ways to fund them. For instance, the ADB was to implement the reconstruction of roads in the North including the A9 highway. However, the ADB was delaying the projects with the preparation of feasibility reports, obtaining ADB board approval and so on. As a result, almost overnight the project was handed over to the Chinese in 2009-10. Majority of the road network was developed during the late President Premadasa’s time. Since then very little investment was done in maintaining or widening the roads, a project which Rajapaksa is pursuing with zeal.
We are reminded of the strategy adopted by the dark forces described in John Perkin’s book ‘Confessions of an Economic Hitman’. The strategy was, according to him, to identify corrupt politicians and get them to borrow colossal amounts of money for unsustainable projects at highly inflated costs and at equally high interest rates in return for large kick backs. Of course the projects are to be awarded to companies hand picked by these ‘Economic Hitmen’ acting for the dark forces. When nations are naturally unable to repay the loans then the Hitmen demand their ‘pound of flesh’, sometimes in natural resources, other times in access to ports and air fields or even votes in support at international bodies. What we are witnessing is the beginning of exactly this strategy; verbatim a la John Perkins. We are falling into the death trap of the Chinese Economic Hitmen! The economic impact of this strategy is not difficult to analyse. Put simply, investors with actual direct investments will be replaced by Chinese loans. In the short term the Government will boast that it is building ports, airports, power stations and stadiums but with no ships at the ports, no planes at the airports, no coal at the power stations and no games at the stadiums we will have to pay back in other ways. The sale of the Galle Face land to CATIC is the first such payment.
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